Introduction

One of the more nuanced areas of the UAE’s transfer pricing (TP) framework relates to transactions with connected persons—particularly salaries, director’s fees, management compensation, and benefits provided to shareholders or related individuals. While the OECD Transfer Pricing Guidelines provide a foundation, the UAE’s Corporate Tax Law (Federal Decree-Law No. 47 of 2022) and related guidance remain less prescriptive in this respect. This creates practical challenges for taxpayers in determining whether such outflows align with the arm’s length principle.

Unlike intercompany financing or royalty arrangements, where global databases and comparables are more established, benchmarking remuneration and benefits is both art and science. The challenge lies in blending market data, regulatory guidance, and commercial substance to arrive at defensible positions before the Federal Tax Authority (FTA).

Connected Persons under UAE TP Law

Article 34 of the UAE Corporate Tax Law sets out the arm’s length principle for related party transactions. Article 36 specifically deals with transactions with connected persons, which typically include:

• Owners/shareholders.
• Directors, partners, and managers.
• Relatives up to the fourth degree.
• Any person able to exert significant influence over the business.

The law requires that any transaction with connected persons must be wholly and exclusively incurred for business purposes and aligned with the arm’s length standard.

The absence of bright-line rules on salaries and benefits, unlike transfer pricing for tangible goods or services creates uncertainty:

• At what level should shareholder-directors be compensated?
• Should expatriate family allowances, schooling costs, and housing benefits be scrutinized?
• How should one justify profit distributions disguised as salaries?

The answers to these questions are critical for UAE taxpayers, especially as FTA is going to evaluate such payments critically.

Why salaries and benefits are a grey zone

Three reasons make this area particularly complex:

1. Dual nature of payments
   • Compensation may straddle two roles: remuneration for services vs. return on capital.
   • Excessive salaries to owners can be recharacterized as disguised dividends.
2. Cultural and regional practices
   • In the UAE, family-owned businesses often pay salaries and benefits that may not align with market benchmarks.
   • Housing, schooling, relocation allowances, and end-of-service gratuities can significantly inflate total compensation.
3. Lack of public comparables
   • Unlike the EU or US, where pay transparency is higher, UAE compensation data is scattered and often not publicly available.

Practical approaches to benchmarking compensation 

A. Internal comparisons (Internal CUP method) 

• Compare salaries paid to connected persons with those paid to unrelated employees of similar role, experience, and responsibility within the same company or group.
• Example: A CFO/shareholder’s salary should be compared with salaries of CFOs of unrelated subsidiaries or divisions.

B. External comparisons (External CUP method)

• Benchmark against publicly available market salary surveys and databases.
• Adjustments may be needed for industry, size of business, and UAE-specific expatriate benefits.

C. Profit-based cross-check

• Test whether remuneration is reasonable relative to company performance.
• Example: If a company makes AED 1m profit, but pays AED 900k salary to its shareholder-director, the FTA may see the excess as a disguised distribution.

D. Hybrid approaches

• Many advisors combine market salary benchmarking with profitability analysis, to create a defensible remuneration package.

Data sources and tools for benchmarking in the UAE

While OECD guidelines don’t prescribe specific data sources, in practice, firms use a blend of global and regional databases. Commonly used resources include:

• Mercer – Comprehensive salary surveys by industry and job function.
• Hay Group (Korn Ferry) – Global pay benchmarking with UAE-specific cuts.
• Willis Towers Watson (WTW) – Salary, bonus, and benefits benchmarking data.
• Databases like KtMine, S&P, BVD do have some reference points for salary benchmarks.
• LinkedIn Salary Insights – Aggregated user-reported salaries, useful for directional benchmarking.
• Bayt.com / GulfTalent – GCC job boards with compensation insights.
• Glassdoor Middle East – Company-level pay reports (though sample sizes can be limited).

For benefits:

• School fee data (KHDA reports, private school websites).
• Housing benchmarks (Bayut, Property Finder).
• Cost of living indices (Numbeo, Mercer Cost of Living survey).

Peculiar Scenarios in the UAE

Through practice, a number of unique cases have emerged:

1. Shareholder-managers drawing high housing allowances – E.g., luxury villa allowances far exceeding market practice.
2. Schooling benefits for children of owners – Common in expat packages, but excessive values may raise red flags.
3. Family members on payroll without clear roles – Nominal or no services rendered; recharacterization risk is high.
4. End-of-service gratuities inflated – Structuring payouts as benefits rather than distributions.
5. Dual role compensation – Same individual being compensated both as board member and executive manager.

How can advisors add value and benchmark these transactions

Tax consultants and advisors play a crucial role in helping businesses:

• Design defensible pay structures aligned with industry benchmarks.
• Document decision-making with market data and internal policies.
• Prepare Local Files with clear functional analysis (i.e., what value does the connected person add?).
• Run sensitivity analyses to show reasonableness under diƯerent scenarios.
• Support during FTA audits with third-party benchmarking reports.

It may be a good practice to always accompany benchmarking with functional analysis, i.e., assessing the actual responsibilities and value creation of the connected person.

Recommended Framework for UAE Taxpayers

A step-by-step framework can help UAE taxpayers mitigate risks:

1. Identify all connected persons receiving salaries/benefits.
2. Map functional contributions (Are they working directors? Passive owners?).
3. Ensure salaries paid are aligned with labour contracts/appointment letters.
4. Collect internal comparables (same company/industry peers).
5. Source external benchmarks from salary databases.
6. Perform reasonableness test vs. company performance.
7. Document policy and rationale in TP files.
8. Review annually to align with changing regulations and market conditions.

Benchmarking salaries, payments, and benefits to connected persons is an underexplored yet critical area of UAE transfer pricing compliance. While regulations remain less detailed compared to other jurisdictions, the FTA has broad powers to challenge excessive or non-arm’s length remuneration.

For businesses, the message is clear:

• Compensation must be justifiable, well-documented, and aligned with market reality.
• Reliance on internal policies without external data exposes companies to disputes.
• Practical benchmarking using salary surveys, cost-of-living data, and profit-based cross-checks oƯers the strongest defence.

Compensation to connected persons may appear, at first glance, to be an HR or governance matter rather than a transfer pricing issue. Yet, under the UAE Corporate Tax Law, such payments sit at the intersection of tax compliance, business substance, and shareholder expectations. The absence of prescriptive guidance from the FTA places the onus squarely on taxpayers to demonstrate that salaries, benefits, and allowances are both commercially justifiable and aligned with the arm’s length principle.

What this means in practice is that companies cannot rely on informal practices or family-owned traditions to defend connected-person pay packages. They must instead adopt structured benchmarking approaches, leveraging internal comparables, external databases, and profitability cross-checks. Equally important is the annual documentation cycle, where policies, functional analyses, and supporting evidence are refreshed to reflect changing market conditions.

What UAE businesses must recognize is:

• Excessive or poorly documented compensation will likely be challenged and recharacterized by the FTA.
• Defensible remuneration is not about minimising pay, but about aligning it to demonstrable value creation and market benchmarks.
• Advisors and taxpayers who proactively invest in robust frameworks today will be far better positioned to withstand scrutiny as the TP regime matures.

Ultimately, benchmarking connected-person compensation is not a one-time compliance exercise, it is a governance discipline that enhances transparency, strengthens stakeholder confidence, and demonstrates commitment to international best practices in transfer pricing.