UAE Transfer Pricing and KMP Salary Benchmarking

With the UAE Corporate Tax Law introduced in 2023, related-party transactions are now under greater scrutiny. One of the most important areas is KMP salary benchmarking, which ensures executive pay complies with the arm’s-length principle.

Businesses must now prove that remuneration for directors, shareholders, and senior executives reflects what independent companies would agree to. Without clear benchmarking, deductions can be disallowed and penalties imposed by the Federal Tax Authority (FTA).

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Why KMP Compensation is Under the Spotlight

KMP salaries are unique because executives often act as both managers and shareholders. This raises concerns about disguised profit distributions rather than genuine compensation.

Traditional methods, such as linking salaries to company profits, are unreliable. Even loss-making companies must pay their executives. At the same time, generic salary surveys don’t capture the differences between industries, business size, and complexity. This is why KMP salary benchmarking with proper documentation is essential.

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Salary Benchmarking for UAE Transfer Pricing

The most effective approach to salary benchmarking is the triangle method, which considers three elements:

• The individual: qualifications, experience, and skills.
• The role: decision-making authority, KPIs, and responsibilities.
• The company: industry sector, size, and financial standing.

This ensures KMP salaries align with economic value creation and comply with transfer pricing rules.

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Methods for KMP Salary Benchmarking

There are three main approaches businesses in the UAE can use:

• Comparable Uncontrolled Price (CUP): Direct comparison with similar roles in other organizations.
• Transactional Net Margin Method (TNMM): Focuses on profitability margins when CUP is not suitable.
• Alternative approaches: Customized methods are allowed when documented and justified.

The method chosen must always be backed by evidence and strong reasoning.

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Key Steps for KMP Salary Benchmarking

To ensure compliance with UAE transfer pricing regulations, companies should follow these steps:

1. Identify Key Management Personnel and confirm their connected-person status.
2. Conduct a functional analysis of the individual, the role, and the company.
3. Choose the most appropriate benchmarking method (CUP, TNMM, or alternative).
4. Collect both internal benchmarks and external salary survey data.
5. Document all compensation policies, contracts, and approvals.
6. Prepare for audit readiness with organized, transparent records.
7. Review and update benchmarks annually or when roles and market conditions change.

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Best Practices for UAE Businesses

Businesses can strengthen compliance by ensuring KMP salary benchmarking is reviewed regularly and kept consistent with market conditions. Transparent pay structures also support corporate governance and build investor confidence.

Audit-ready documentation reduces the risk of penalties, protects tax deductions, and demonstrates compliance with UAE transfer pricing laws.

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Conclusion

KMP salaries in the UAE are no longer just a boardroom decision. They are a transfer pricing compliance requirement. By implementing KMP salary benchmarking with structured analysis, proper methods, and clear documentation, companies can safeguard themselves against tax risks and build a stronger foundation for growth.

AM Audit helps UAE businesses navigate this process with expert benchmarking solutions, ensuring compliance and transparency in executive compensation.