Mistake 1: Charging Management Fees Without Substance or Documentation

Management fees are one of the most common intercompany transactions — and one of the most scrutinised. A parent company or holding entity charges a subsidiary a fee for “management services,” often covering strategy, finance, HR, or oversight functions.

The problem is that many businesses charge management fees that are either not supported by actual services being provided, or are not priced based on any identifiable methodology. The FTA will ask: what services were actually delivered? Who delivered them? What would an independent third party have paid for the same services?

What triggers the audit: A large, round-number management fee (e.g., “10% of revenue”) charged with no underlying service agreement, no time records, and no evidence of service delivery. Or a management fee flowing from a low-tax free zone entity to a higher-tax mainland entity — a structure that looks like profit-shifting.

What to do instead: Document the services with a formal intercompany service agreement. Maintain evidence of delivery (reports, meeting records, email trails). Use a cost-plus methodology supported by benchmarking data showing what third-party service providers charge for comparable services.

Mistake 2: Intercompany Loans With No Interest — or the Wrong Rate

When one group entity lends money to another, the arm’s length principle requires that the loan carries a market-rate of interest. A zero-interest loan between related parties is, in most cases, not what independent parties would agree to.

Equally problematic is charging an interest rate that is too high or too low without a defensible methodology. Both can be challenged — a rate that is too high artificially inflates deductible interest in the borrowing entity; a rate that is too low under-taxes the lending entity.

What triggers the audit: Intercompany loans with no written agreement, no interest charge, or a flat rate (like “5% because it seemed reasonable”) that has no connection to prevailing market rates or the creditworthiness of the borrowing entity.

What to do instead: Establish formal loan agreements for every intercompany lending arrangement. Price the interest rate using the OECD-endorsed method — typically by benchmarking against comparable third-party debt or using the risk-free rate plus a credit spread appropriate for the borrower’s credit profile.

Mistake 3: Free Zone to Mainland Transactions That Erode the Tax Base

This is a structuring risk specific to the UAE. A free zone company paying 0% CT on qualifying income transacts with a related mainland company paying 9% CT. If goods, services, or IP are transferred from the mainland entity to the free zone entity below market value — or if fees flow from the mainland to the free zone above market value — profits are effectively shifted from the 9% environment to the 0% environment.

The FTA is acutely aware of this dynamic. Transactions between free zone and mainland related parties are among the highest-risk from a transfer pricing audit perspective.

What triggers the audit: Unusual profitability patterns — a free zone entity consistently reporting high margins while a related mainland entity reports thin or zero margins. Or a free zone entity receiving large royalties, service fees, or interest payments from a mainland related party without clear economic justification.

What to do instead: Ensure all free zone / mainland transactions are on arm’s length terms, documented with formal agreements, and benchmarked against comparable independent transactions. Be especially careful with IP licensing arrangements and shared services between the two.

Mistake 4: Using the Same Price for Related and Third-Party Transactions Without Analysis

Some businesses assume that because they charge a related party the same price as an unrelated customer, they are automatically compliant. This is not always correct.

The arm’s length analysis is not just about the price — it also considers the terms of the transaction, the volume, the credit terms, the risk allocation, and the functions performed. A transaction with a related party at the “same price” as third parties may still be non-arm’s length if the contractual terms, warranties, or risk profile differ materially.

What triggers the audit: A business that simply points to its standard price list as evidence of arm’s length pricing without any analysis of whether the related-party transaction is truly comparable to third-party transactions.

What to do instead: Conduct a proper comparability analysis. Consider whether the related-party transaction involves the same functions, assets, risks, terms, and market conditions as the third-party comparables you are relying on.

Mistake 5: No Written Intercompany Agreements

This is the most basic — and most common — mistake. Businesses frequently conduct intercompany transactions without any formal written agreements in place. There is an informal understanding between owners, a pattern of payments, and nothing else.

The FTA expects to see contemporaneous documentation. An agreement written after the transaction has taken place, or worse, after an audit has been initiated, has significantly less credibility than one prepared before the transaction occurred.

What triggers the audit: A business that discloses significant related-party transactions on its disclosure form but cannot produce any agreements, invoices, or correspondence establishing the terms of those transactions.

What to do instead: Put formal intercompany agreements in place for every recurring transaction type — service agreements, loan agreements, IP licence agreements, distribution agreements. These should be signed before the transaction begins, reviewed annually, and updated when circumstances change.

Mistake 6: Ignoring the Arm’s Length Principle on Founder Remuneration

This mistake catches many founder-led businesses off guard. Where a founder provides services to their own company — in their capacity as a director, consultant, or advisor — and charges a fee or salary, the FTA may assess whether that remuneration is arm’s length.

This cuts both ways. A founder charging excessive consulting fees to extract profits tax-efficiently, or conversely a founder providing significant services to their company for free (creating understated expenses), can both attract scrutiny.

What triggers the audit: A sole founder charging their company AED 3 million per year in “consulting fees” while the company has limited revenues — a pattern that looks like profit extraction rather than genuine remuneration for services rendered.

What to do instead: Benchmark director and senior executive remuneration against comparable market data. Ensure that founder compensation reflects the actual functions performed, the time committed, and what an independent professional would be paid for equivalent services.

Mistake 7: Cost-Sharing Arrangements That Do Not Reflect Actual Benefit

Cost-sharing arrangements — where two or more related entities pool costs for shared services, shared IP development, or shared infrastructure — are legitimate and commercially common. But they are also easy to get wrong.

The FTA will assess whether each participant in a cost-sharing arrangement actually benefits from the shared activity in proportion to the costs they are bearing. A UAE entity bearing a share of global head office costs for services it does not use, or paying into an IP development cost pool for technology it does not deploy, is a red flag.

What triggers the audit: A UAE subsidiary contributing a fixed percentage of global group costs to a central cost pool without any analysis of which specific services it benefits from, what the value of those services is, or how the allocation key was derived.

What to do instead: Conduct a detailed benefit analysis for each cost category in the sharing arrangement. Use allocation keys that genuinely reflect the proportion of benefit received — headcount, revenue, assets, or usage data depending on the nature of the cost.

Mistake 8: Inconsistent Treatment of the Same Transaction Across Periods

Transfer pricing compliance is not a one-time exercise. The arm’s length pricing for a transaction established in year one should be reviewed and, where necessary, updated in subsequent years. Market conditions change, the functions performed by each party change, and the risk profile of transactions can evolve.

Businesses that set a transfer price in 2023 and apply the same methodology and rate indefinitely — without revisiting whether it remains arm’s length — are exposed to challenge in later periods.

What triggers the audit: A benchmarking study prepared in 2023 that is used without update through 2026, despite material changes in market interest rates, sector profitability, or the entity’s business model. Or an inconsistency between how the same transaction is characterised in the UAE entity’s documentation versus how the counterparty in another jurisdiction characterises it.

What to do instead: Review and refresh transfer pricing studies at least every three years, or sooner when there is a material change in the business, the transaction, or the economic environment. Ensure that the characterisation of each transaction is consistent across all jurisdictions involved.

Mistake 9: No Benchmarking Study to Support Pricing

Simply having a written agreement and a plausible price is not sufficient. The UAE CT Law and the OECD Guidelines require that related-party prices be supported by a benchmarking study — a documented comparison against comparable transactions between independent parties.

Many businesses — particularly smaller ones — skip this step, either because they are unaware of the requirement or because they consider it unnecessary for straightforward transactions. The FTA may disagree.

What triggers the audit: A Local File that contains intercompany agreements and a description of the transactions but no benchmarking data. Or a benchmarking study that uses comparables that are not genuinely comparable — different industries, different geographies, different business models.

What to do instead: Prepare a benchmarking study using a recognised database (Bureau van Dijk’s Orbis is commonly used) or third-party data appropriate to the transaction type. The study should identify comparable companies or transactions, apply appropriate adjustments, and establish an arm’s length range within which your actual pricing falls.

Mistake 10: Misclassifying Non-Qualifying Income to Protect Free Zone Status

This is a compliance risk rather than a pure transfer pricing mistake, but it is closely related. Free zone businesses that are approaching the de minimis threshold — where non-qualifying income exceeds 5% of total revenue or AED 5 million — have an incentive to reclassify transactions to protect their QFZP status.

If related-party transactions are re-characterised or mis-described to make mainland-sourced revenues appear as foreign-sourced revenues, this is not a transfer pricing issue — it is potential tax fraud. But the FTA’s transfer pricing audit process is one of the mechanisms through which it identifies this kind of misclassification.

What triggers the audit: A free zone entity consistently reporting non-qualifying income at just below the de minimis threshold, year after year, despite a business model that involves significant transactions with UAE mainland related parties.

What to do instead: Accurately classify the source and nature of all revenues. If non-qualifying income is approaching the threshold, take genuine structural steps to address it — rather than cosmetic reclassification.