We do business with a sister company — what does the arm's length principle actually mean for pricing?

The arm's length principle requires that any transaction between related parties or connected persons — a sale of goods, a service, a financing arrangement, or licensing an intangible asset — be conducted on the same terms and pricing that two genuinely independent parties would have agreed. This applies to domestic and cross-border transactions alike, even between two companies in the same free zone. The law recognizes five methods to demonstrate the price used is actually at arm's length: the Comparable Uncontrolled Price method (suited to commodities, loans, and licensing), the Resale Price method (for distributors), the Cost-Plus method (for manufacturing and services), the Transactional Net Margin Method, and the Profit Split method (for joint ventures and high-value intangibles).

The obligation isn't just choosing a sound pricing method — it's documenting it. Businesses with standalone revenue of AED 200 million or more (or that belong to a multinational group with consolidated revenue of AED 3.15 billion or more) must maintain a Local File and a Master File documenting these transactions, while any business with related-party transactions — regardless of size — must file a disclosure form with its tax return. It's the absence of adequate documentation, not the pricing decision itself, that turns a reasonable price into risk once the FTA reviews it. RASEEKH helps select the right method and document it from the start of the relationship between the parties, not after a review has already opened.