What does the 'Arm's Length' principle mean in pricing between related companies?

The arm's length principle states that any transaction between two related parties — such as two companies under the same owner — must be priced the same way it would be if the two parties were fully independent and negotiating normally in the open market, with no favour granted because of their relationship. This covers goods sold between group companies, management fees, intercompany loans, and licensing of a brand or intellectual property.

The principle exists because related parties lack the natural negotiating tension that exists between independent businesses; without this rule, profit could be shifted artificially between companies to reduce overall tax. A common UAE example: a mainland company sells to a related free zone company at well below market price — if that price doesn't reflect a genuine market rate, the tax authority can re-price the transaction for tax purposes even though the invoice shows a different figure. RASEEKH helps clients document a pricing policy that genuinely reflects the market.