Cross-Border Business and Transfer Pricing: What UK-UAE Companies Need to Know
British Chamber of Commerce Dubai (BCCD)
We connect, promote and support British businesses that are already in Dubai and those looking to explore the region.
Transfer pricing is a critical aspect of international business operations, especially for companies operating across borders, such as those engaged in UK-UAE transactions.
It involves setting prices for transactions between related entities within a multinational corporation, including the sale of goods, services, intellectual property, and financial arrangements.
Proper transfer pricing ensures that each jurisdiction receives its fair share of tax revenue, and it prevents profit shifting that could undermine a country’s tax base.
Introduction to Transfer Pricing and the Arm’s Length Principle
At the core of transfer pricing is the arm’s length principle, which stipulates that transactions between related entities must be conducted as if they were between unrelated parties under comparable circumstances.
This principle is widely accepted by the Organisation for Economic Co-operation and Development (OECD), and it serves as the foundation for transfer pricing regulations worldwide.
Transfer pricing is influenced by several methodological approaches, including the comparable uncontrolled price method, the resale price method, the cost plus method, and profit split methods.
Tax authorities such as the HMRC in the UK and FTA in the UAE scrutinize transfer pricing arrangements through documentation and audits to prevent artificial shifting of profits and to enforce compliance with Transfer Pricing Legislation.
UK-UAE cross-border transactions often involve complex arrangements such as licensing, cost sharing, or intra-group financing. Another critical issue in UK-UAE operations pertains to the recognition of permanent establishments (PEs). Firms must navigate creating PEs under UK and UAE law, and consider anti-avoidance provisions.
It is clear that activities in one country that create a fixed base or involve significant economic activity can constitute a PE, thereby creating a taxable presence.
The recognition of a PE is crucial because profits attributable to a PE must be correctly allocated under transfer pricing rules, avoiding double taxation or under-taxation issues.
Challenges in Transfer Pricing for UK-UAE Businesses
The UK and UAE present a unique landscape for transfer pricing considerations.
The UK has a well-developed transfer pricing regime aligned with OECD guidelines, emphasizing comprehensive documentation and risk-based audits. In addition, the UK legislation covers only companies with a turnover of EUR50 million at the least. In contrast, the UAE, being a relatively new player in the global tax arena, has historically relied on a free zone regime with limited direct tax enforcement.
However, with the introduction of VAT and other indirect taxes, the UAE has signaled its intention to align more closely with international tax standards, including transfer pricing. Both jurisdictions contains comprehensive three-tiered documentation requirements, including a Master file, a Local file and a Country-by-country Report.
For UK-UAE businesses, navigating these differing regulatory environments requires meticulous attention to these aspects of documentation. However, pure adherence to legislation is not enough. Multinationals must also consider transfer pricing in their strategic planning. They need to establish clear transfer pricing policies that reflect economic substance and adhere to both jurisdictions’ requirements.
Under the UK-UAE double taxation treaty (effective in 1998) treaty, companies engaged in UK-UAE transactions can benefit from reduced withholding tax rates, and they have clearer guidance on transfer pricing adjustments and dispute resolution.
For example, if a UK company transfers intellectual property to a UAE affiliate, the treaty helps prevent double taxation by establishing the source country’s taxing rights and providing relief measures.
Implications for UK-UAE Businesses
The interplay between transfer pricing regulations, bilateral tax treaties, and international standards creates a complex landscape for UK-UAE businesses. Several key implications include:
Future Outlook
The evolving international tax landscape, driven by OECD initiatives such as BEPS (Base Erosion and Profit Shifting), will likely increase scrutiny on transfer pricing practices. Both the UK and UAE are expected to tighten their regulations and enforcement measures, emphasizing transparency and consistent documentation.
UK-UAE businesses should proactively review and update their transfer pricing strategies to align with international standards, optimize cross-border structuring, and mitigate risks.
Collaborating with tax advisors and leveraging treaty benefits will be crucial in navigating the complexities of transfer pricing in this dynamic environment.
UK Transfer Pricing Evolution
In the UK, diverted Profits Tax was introduced in 2015. It is a targeted measure that counters contrived arrangements designed to avoid profits being taxed in the UK. It is a standalone tax, though it borrows many of the principles of the transfer pricing and permanent establishment rules.
The UK transfer pricing legislation is contained within Part 4 Taxation (International and Other) Provisions Act 2010 (TIOPA 10). In addition, the UK Diverted Profits Tax legislation is contained within Part 3 Finance Act 2015 (FA 15). Further, the UK permanent establishment legislation is contained within section 5 and 19-32 of Corporation Tax 2009 (CTA 09) and sections 1141-1153 of Corporation Tax Act 10 (CTA 10).
The HMRC consulted on proposals to reform the UK’s legislation on transfer pricing, permanent establishment and Diverted Profits Tax in the summer of 2023 and issued a summary of responses in January 2024. This legislation, finalized in April 2025, had an impact on participation conditions, exempt domestic transactions, valuing intangibles, removal of sanctioning TP determinations, clarification that OECD principles must be followed and financial transactions.
Conclusion
Transfer pricing remains a fundamental aspect for international businesses, notably those involved in UK-UAE transactions.
Anchored by the arm’s length principle and reinforced by bilateral treaties, effective transfer pricing management ensures compliance, minimizes double taxation, and supports sustainable cross-border operations. For UK-UAE businesses, understanding and applying these principles is essential not only for legal adherence but also for strategic financial planning. As international tax standards continue to evolve, proactive approaches—such as maintaining thorough documentation, leveraging treaty benefits, and consulting with tax professionals—will be crucial in navigating the complexities of transfer pricing in the UK and UAE.
Embracing transparency and aligning practices with OECD guidelines will position businesses to effectively manage risks and capitalize on opportunities within this dynamic global tax environment.
We will be discussing transfer pricing and its implications for UK-UAE businesses in the upcoming BCCD business briefing Transfer Pricing Trends: UK & UAE Sponsored by PB First Global Tax on Wednesday 3rd September 8-10AM at voco Dubai. Members and non-members can register via this link.
Author: Alicja Reuben, PhD , Transfer Pricing Lead, PB First Global Tax
Dr. Alicja Reuben is a transfer pricing expert and former professor in management. She has over 12 years of experience in transfer pricing, starting in Washington, DC in 2004. Since then, she has worked at organizations in the United States, Spain, Poland and the UAE (where she has been based since 2016). She has serviced clients globally, in jurisdictions such as North America, Europe, East Asia, the Middle East and Africa.