In Brief

1. Under Articles 34 and 36 of the CT Law, any payment to a company’s owner, director, or connected person is deductible only if it reflects the market value of the service provided. A salary that significantly exceeds the arm’s length benchmark can be recharacterised as a non-deductible distribution.

2. Formal Master File and Local File documentation is required only for entities with revenue exceeding AED 200 million (Ministerial Decision No. 97 of 2023). But Article 55 of the CT Law requires all taxable persons to maintain records that demonstrate arm’s length compliance, regardless of size.

3. Building a contemporaneous defence file that benchmarks the owner-manager’s compensation before the FTA asks for it is significantly more effective than assembling one after an inquiry arrives.

Before the introduction of the UAE corporate tax regime, the relationship between a sole owner and their company’s bank account was, in many cases, largely informal. If you owned 100% of the shares and served as the sole director, you could pay yourself whatever amount suited your personal cash flow needs. The company’s profit was, for practical purposes, your money. Federal Decree-Law No. 47 of 2022 (the “CT Law”) changed that. The law introduced an OECD-aligned transfer pricing framework that applies to all transactions between related parties and connected persons, including the most common transaction of all: the salary a founder pays themselves from their own company. If that salary doesn’t reflect the market rate for the services actually performed, the FTA can recharacterise the excess as a non-deductible expense, add it back to the company’s taxable income, and apply penalties for underreporting.

Transfer Pricing (cid:127) Corporate Tax (cid:127) Related Parties (cid:127) Arm’s Length Principle

How the CT Law treats payments between an owner and their company

The transfer pricing rules relevant to owner-manager compensation sit across three articles of the CT Law, each defining a different aspect of the relationship.

Article	Definition	Practical effect

Article 34	Establishes the arm’s length principle: transactions between related parties must reflect what independent parties would agree under comparable circumstances.	Every payment from the company to its owner must pass this test.
Article 35	Defines “Related Parties”: includes the relationship between a natural person and a company in which they hold a 50% or greater ownership stake.	Most owner-managed businesses fall squarely within this definition.
Article 36	Defines “Connected Persons”: a narrower category covering the owner, directors, officers, and their relatives up to the fourth degree.	Payments to connected persons are deductible only if made wholly and exclusively for business purposes and at market value.

The combined effect is that the owner’s salary is treated the same way as any other related-party transaction. It must be justifiable by reference to what an independent company would pay an unrelated person to perform the same role, with the same qualifications, in a business of comparable size and sector.

What an FTA recharacterisation looks like in practice

Worked example: a boutique consultancy in DMCC A sole-owner consultancy generates AED 2,000,000 in gross profit. The owner pays themselves a salary of AED 2,000,000, reducing the company’s taxable profit to zero. On audit, the FTA applies Article 34 and looks for comparables. Using local and regional salary data (as outlined in the FTA’s Transfer Pricing Guide), the FTA finds that the interquartile range for a general manager in a firm of this size is AED 450,000 to AED 600,000. The FTA determines that AED 500,000 is the arm’s length salary. The remaining AED 1,500,000 is recharacterised as a non-deductible expense (in substance, a disguised distribution to the shareholder). That AED 1,500,000 is added back to the company’s taxable income. The tax consequence: 9% on the adjusted profit (after the AED 375,000 zero-rate band). Under Cabinet Decision No. 75 of 2023, underreporting penalties of up to 15% may also apply, plus monthly interest at the rate specified in the penalty framework for each month the tax remained unpaid.

Documentation requirements: what the law actually requires from

SMEs

A common misconception is that transfer pricing documentation is only relevant to large multinational groups. It’s true that under Ministerial Decision No. 97 of 2023, the obligation to maintain a formal Master File and Local File applies only to entities with revenue of AED 200 million or more (or entities that are part of an MNE group with consolidated revenue of AED 3.15 billion or more). But Article 55 of the CT Law imposes a separate, broader obligation. All taxable persons are required to maintain records and documents that demonstrate their related-party transactions comply with the arm’s length principle. If the FTA requests evidence that the owner’s salary reflects market value, the entity has 30 days to produce it. Starting the research after the request arrives is a poor position to be in. Salary benchmarks need to reflect the period under review, not the period when the inquiry was received. A contemporaneous file, prepared at the time the compensation was set, carries significantly more weight than a retrospective justification.

Building a defensible compensation structure

For owner-managed businesses, transfer pricing compliance for the founder’s salary doesn’t require a 100-page Master File. It requires a focused, well-documented approach that addresses four areas.

Functional analysis The starting point is documenting what the owner actually does. Many founder-operators perform multiple roles simultaneously: chief executive, lead salesperson, and creative director. A functional analysis that accurately describes the scope of the role, the decisions taken, and the risks assumed provides the basis for justifying a higher-than-average compensation level.

Economic benchmarking Using salary databases, industry reports, and recruitment data to identify comparable roles in businesses of similar size, sector, and geography. The FTA’s Transfer Pricing Guide references the use of internal and external comparables. The benchmark should reflect the interquartile range (25th to 75th percentile) of comparable compensation, with the owner’s salary falling within or close to that range.

Formal employment documentation Every salary payment should be supported by a formal employment agreement and a board resolution authorising the compensation. Informal transfers from the company account to the owner’s personal account, without any contractual basis, are precisely the type of arrangement that triggers scrutiny.

A structured salary-and-dividend split Rather than extracting the entire profit as salary, a defensible approach splits the owner’s total compensation into a salary component (deductible, but subject to the arm’s length test) and a dividend component (non-deductible, but treated as a distribution of post-tax profit). This structure reduces the risk of recharacterisation because the salary component stays within the arm’s length range, and the dividend component is clearly identified as a return on the owner’s equity investment.

How the FTA identifies compensation anomalies

The FTA has access to data from the Wage Protection System (WPS), through which all UAE salaries are processed, and from corporate tax returns. This allows cross-referencing of reported salary expenses against industry norms and company revenue levels. An owner-manager salary that represents a significant statistical outlier relative to the company’s revenue and sector is likely to generate an inquiry. The disclosure thresholds for the related-party transaction schedule within the tax return are AED 40 million in aggregate related-party transactions, or AED 4 million for any single transaction category. While many SME owner salaries fall below these thresholds, the FTA retains the authority to request documentation from any taxable person at any time under Article 55.

Getting this right before the first audit cycle completes

The first full audit cycles under the CT Law are expected to complete through 2026 and 2027. Owner-managed businesses that haven’t reviewed their compensation structure against the arm’s length standard should treat that review as a priority. The cost of preparing a defence file now is a fraction of the cost of a recharacterisation, penalties, and interest after the fact. The Alldren tax team prepares owner-manager remuneration policies for SMEs, including functional analysis, economic benchmarking, and the formal documentation needed to support the salary during an FTA inquiry. For a review of your current compensation structure, contact our team.

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This article is for general informational purposes only and does not constitute legal, tax, or financial advice. Readers should seek professional advice tailored to their specific circumstances. Transfer pricing rules apply to all taxable persons under the CT Law, including free zone entities. Information is current as of March 2026 and may be subject to change.