Tax & ZakatTransfer Pricing
Synonyms: Related-Party Pricing، Arm's Length Pricing، Intra-Group Pricing
Last updated: 2026-09-25
Short Definition
Transfer pricing is the setting of prices for transactions between related parties, such as a parent company and its subsidiaries or companies under common control, so that they match what independent parties would agree in comparable circumstances, known as the arm's length principle.
Overview
Transfer pricing is the setting of prices for transactions between related parties, such as a parent company and its subsidiaries or companies under common control, so that they match what independent parties would agree in comparable circumstances, known as the arm's length principle. Its purpose is to prevent profits being shifted between entities through artificial prices to reduce tax or zakat.
In Saudi Arabia the rules rest on Article 63 of the Income Tax Law, which allows ZATCA to reallocate income and expenses between related parties to reflect what would have arisen had they been independent, and on the Transfer Pricing Bylaws approved by ZATCA's Board on 25/5/1440H (31 January 2019). The Bylaws require income taxpayers to file a disclosure form for related-party transactions regardless of value, to maintain a Master File and Local File where such transactions exceed SAR 6 million in a 12-month period, and to submit a Country-by-Country Report for multinational groups with consolidated revenue of SAR 3.2 billion or more. The principle applies to domestic and cross-border transactions alike. Since the Implementing Regulations for Zakat Collection (1445H), applicable to financial years starting on or after 1 January 2024, the transfer pricing rules also apply to zakat payers' transactions with related entities.
In real estate, transfer pricing arises when an operating company leases property from a sister company, in intra-group property-management, development and supervision fees, shareholder loans, and sales of land or units between group companies. If an operating company pays above-market rent to a related property company, ZATCA may adjust the deducted expense to market level. Contemporaneous documentation, such as a rental benchmarking study, an accredited valuation and written contracts, is the first line of defence.
⚖️ Legal Basis
Transfer pricing rules rest on Article 63 of the Income Tax Law issued by Royal Decree No. (M/1) dated 15/1/1425H (anti-avoidance and reallocation between related parties) and on the Transfer Pricing Bylaws issued by resolution of ZATCA's Board dated 25/5/1440H (31 January 2019). Article 22 of the Implementing Regulations for Zakat Collection, issued by Minister of Finance Decision No. (1007) dated 19/8/1445H, applies the transfer pricing rules to a zakat payer's transactions with related entities.
💡 Practical Example
A resident hotel company is 60% owned by a foreign partner, whose share is subject to 20% income tax. The company leases a building from a sister property company for SAR 12,000,000 a year, while a benchmarking study shows comparable buildings rent for SAR 8,500,000 to 9,500,000. ZATCA may adjust the deducted rent to the top of the market range (SAR 9,500,000), disallowing SAR 2,500,000; the foreign partner's share is SAR 1,500,000, and 20% tax on it is an extra SAR 300,000, with a late-payment fine of 1% for every 30 days from the due date. Because the transaction exceeds SAR 6 million, the company must also maintain a Local File and Master File and file the disclosure form with its annual return.
⚠️ Common Mistakes
- ✗Believing transfer pricing concerns only cross-border transactions — the arm's length principle applies to domestic and international transactions alike.
- ✗Skipping the disclosure form because transactions are small — it covers related-party transactions regardless of value; the Master File and Local File exemption is a separate matter.
- ✗Setting rent or management fees between sister companies without a benchmarking study or accredited valuation.
- ✗Assuming wholly Saudi-owned companies are out of scope — since financial years starting in 2024, the transfer pricing rules apply to zakat payers' transactions with related entities.
- ✗Preparing documentation only after ZATCA asks — after-the-fact files are less persuasive and may not suffice.
🌍 International Differences
Transfer pricing rules worldwide are based on the OECD guidelines and the arm's length principle, the source of the Master File, Local File and Country-by-Country Report requirements. The UAE introduced transfer pricing rules alongside its corporate tax, and Turkey and Egypt have applied similar rules for years. The Saudi regime stands out for extending transfer pricing to zakat payers from 2024 and for applying it to domestic transactions between sister companies, which matters greatly for family real estate groups that separate asset ownership from operations.
FAQs
What is the arm's length principle in transfer pricing?▾
It requires transactions between related parties to be priced as independent parties would agree in comparable circumstances; ZATCA may adjust non-compliant prices and reallocate income and expenses.
Who must prepare a Master File and Local File in Saudi Arabia?▾
Corporate income taxpayers whose related-party transactions exceed SAR 6 million in a 12-month period; natural persons and those below the threshold are exempt, although ZATCA may request documentation in certain cases.
Do transfer pricing rules apply to zakat payers?▾
Yes. The Implementing Regulations for Zakat Collection (1445H), applicable to financial years starting on or after 1 January 2024, apply the transfer pricing rules to a zakat payer's transactions with related entities.
Does transfer pricing cover rent between sister companies?▾
Yes. Rent, management and development fees, loans and land sales between group companies are all related-party transactions that must be at market price, ideally supported by a benchmarking study or accredited valuation.
What happens if related-party prices are not at arm's length?▾
ZATCA adjusts income or expenses to market price and claims the resulting tax or zakat with the applicable late-payment fines, and penalties for breaching documentation and disclosure requirements may be added.
