As the UAE continues its journey towards aligning with global tax standards, Transfer Pricing (TP) has become a key regulatory focus under the country’s Corporate Tax regime. Among the areas drawing the most attention from tax authorities is the remuneration of Key Management Personnel (KMP), especially when these individuals also happen to be shareholders, directors, or otherwise Connected Persons.
With the Federal Tax Authority (FTA) and financial regulatory authorities actively assessing the fairness of such payments, it’s crucial for UAE businesses to ensure that any remuneration to these individuals is defensible, well-documented, and consistent with the Arm’s Length Principle (ALP).
Let’s unpack what this means for your business, explore salary benchmarking for transfer pricing, and highlight common pitfalls to avoid.
What Is Transfer Pricing (TP)?
Transfer Pricing is a tax concept that governs the pricing of transactions between Related Parties or Connected Persons, that is, people or entities with a relationship that could influence the terms of the transaction. These transactions must be priced as if they were carried out by independent parties under comparable conditions known as the Arm’s Length Principle.
Why It Matters:
The goal is to prevent companies from manipulating prices to shift profits to jurisdictions with lower or zero tax and ensure fair taxation in each country where they operate.
In the UAE, TP is governed by Article 34 of the Corporate Tax Law and is further supplemented by OECD-aligned guidelines.
To know more on transfer pricing, click here.
Controlled Transactions: The Trigger Point
TP rules apply to any controlled transaction between a taxable entity and its related or connected parties. These can include:
- Sale or purchase of goods or services
- Provision of loans, guarantees, or financial support
- Use of intellectual property, trademarks, or managerial expertise
- Director or partner remuneration and benefits
Even domestic transactions between UAE entities (or individuals and entities) must comply if they involve connected persons.
Who Are Connected Persons?
The term “Connected Persons” under UAE law includes:
A Connected Person includes:
- Owners – Anyone who holds ownership in the business, such as shareholders or partners.
- Directors or Officers – Individuals involved in managing the company or making executive decisions.
- Related parties of the persons above
Salary Benchmarking for Transfer Pricing: Why the Emphasis?
Connected persons can influence how much they are paid or how profits are allocated. Without oversight, this opens doors for non-arm’s-length arrangements that reduce a business’s taxable income.
KMP Remuneration: Why It Falls Under TP Scrutiny
Key Management Personnel (KMP) are individuals who play a significant role in managing a company’s strategy and operations such as CEOs, CFOs, General Managers, and board members.
The authorities may question whether the KMP remuneration is genuinely commercial or influenced by their ability to control the business. In such cases, salary benchmarking for transfer pricing becomes critical to demonstrate that the compensation aligns with the Arm’s Length Principle and reflects market-based rates.
Key Requirements:
- Payment must be at arm’s length: Comparable to what a similar company would pay to a third party for similar services.
- Documented rationale is essential: Especially for mixed roles (e.g., a shareholder also acting as the managing director).
- Disclosure is mandatory: Relevant transactions must be reported in the TP Disclosure Form (wherever aggregate value exceeding AED 500,000) and backed by evidence.
Why Benchmarking KMP Compensation Is Challenging?
Compensating KMP is rarely straightforward. Their remuneration is often made up of:
- Fixed salary
- Performance-based bonuses
- Director fees
- Stock options
- Housing or travel allowances
- End-of-service benefits or incentives
Each of these components may require salary benchmarking for transfer pricing. Further complexity arises when the individual wears multiple hats as both strategic decision-maker and operational manager.
Salary Benchmarking for Transfer Pricing: Common Challenges Businesses Face
- Lack of UAE-Specific Data: Market salary surveys for senior roles in UAE-specific sectors may be hard to come by.
- Subjectivity in Role Assessment: Each KMP role is unique. Job titles don’t always reflect responsibilities.
- Closely-Held Companies: Director-shareholders often perform multiple roles, blurring the line between investment returns and executive compensation.
- FTA Review Sensitivity: Payments to connected persons may trigger audit reviews if not well-documented or appear excessive.
- Changing Regulations: As UAE TP guidance evolves, businesses must stay agile and update their compliance frameworks accordingly.
Practical Steps to Stay Compliant
Here’s how you can prepare and defend your KMP remuneration under the UAE transfer pricing regime:
1. Conduct a Functional Analysis (FAR)
Map out the functions performed, assets used, and risks assumed by KMPs. This analysis forms the basis for justifying their remuneration.
2. Use Third-Party Salary Benchmarks
Compile data from reliable UAE or GCC-specific sources. Keep screenshots, citations, or research logs for documentation.
3. Document Board Decisions and Contracts
Maintain board meeting minutes, employment contracts, and bonus criteria to evidence the commercial basis of pay.
4. Segregate Roles and Compensation
If a shareholder is also a manager, break down their compensation into strategic vs. operational roles and only claim a deduction for whatever is warranted by the TP analysis.
5. Maintain a Transfer Pricing Policy
Even if not legally required, a formal TP policy provides clarity and protects against scrutiny.
6. Seek Professional Advice
Engage TP specialists or advisors to guide complex benchmarking and handle documentation requirements like the TP Disclosure Form, Local File, and Master File (if applicable).
Why It Pays to Get It Right
By ensuring your KMP remuneration is well-structured and defensible, your business can:
- Avoid FTA penalties and disputes
- Ensure full tax deductibility of management expenses
- Build a stronger governance framework
- Boost investor confidence through transparency
- Align with global best practices
Looking Ahead: The Strategic Takeaway for Salary Benchmarking for Transfer Pricing
With increasing regulatory oversight, businesses must treat payments to directors and KMP with the same rigor as any third-party transaction. The cost of non-compliance is far greater than the effort required to put proper salary benchmarking for transfer pricing and documentation in place.
Whether you’re a small family-run business or a multinational operating in the UAE, now is the time to reassess your KMP arrangements and bring them in line with Transfer Pricing expectations.
How Can MS Help?
At MS, we help UAE businesses tackle the complexities of employee and executive compensation with precision, compliance, and clarity. Whether you’re looking to benchmark salaries in line with UAE transfer pricing requirements, assess existing pay structures, or align your compensation strategy with both local regulations and global standards, our experts deliver data-driven, tailored solutions.
From detailed salary benchmarking for transfer pricing reports to equity reviews and cross-border remuneration strategies, we ensure your approach to compensation is not only compliant and defensible—but also a powerful tool for performance, transparency, and long-term talent retention.