What Is the Arm’s Length Principle in UAE Corporate Tax?
The Arm’s Length Principle (ALP) is a fundamental rule in the UAE Corporate Tax regime. It requires that transactions between related parties—such as shareholders, subsidiaries, or family-owned entities—must be conducted on the same terms as if they were between independent, unrelated businesses.
In simple terms, the prices, fees, or terms applied should reflect fair market value.
Examples:
- If a company provides services to its shareholder, the fee must match what an independent third party would pay.
- If office space is rented to a related entity, the rent should align with market rates in the same area.
Why Is the Arm’s Length Principle Important in the UAE?
The UAE introduced Corporate Tax to align with international tax standards and promote transparency. The Arm’s Length Principle plays a key role in this system by ensuring:
- ✅ Fairness in profit reporting
- ✅ Prevention of tax avoidance through related-party dealings
- ✅ Trust and compliance with the Federal Tax Authority (FTA)
Business Impact: What Companies Need to Know
For companies operating in the UAE, applying the Arm’s Length Principle means:
- Documentation Requirements: Businesses should maintain records proving that related-party transactions are conducted fairly.
- Reduced Risk of Penalties: Compliance minimizes the chances of disputes or adjustments by the FTA.
- Enhanced Credibility: Transparent and market-based dealings strengthen your company’s reputation with stakeholders.
How We Support UAE Businesses with Corporate Tax Compliance
Understanding and applying the Arm’s Length Principle can be challenging, especially for businesses with multiple shareholders or group structures. Our tax advisory services include:
- ✅ Reviewing related-party agreements for compliance
- ✅ Advising on fair business terms with shareholders or connected entities
- ✅ Providing expert guidance on UAE Corporate Tax requirements
Final Thoughts
The Arm’s Length Principle in UAE Corporate Tax is not just a regulation—it’s a safeguard to ensure businesses remain compliant, transparent, and future-ready. Acting early to review related-party transactions can save your business significant risks and penalties.
👉 Contact us today to get expert support with UAE Corporate Tax compliance and ensure your business operates confidently under the new rules.