A commission rate that was set once, years ago, and never revisited is one of the more common transfer pricing gaps in UAE groups. Where a UAE entity introduces customers, negotiates or supports sales on behalf of an overseas Related Party without taking title to the goods, the commission it earns is a Related Party payment in its own right and has to reflect what an independent agent performing the same role would be paid.
Commission and agency structures are common in UAE groups: a local entity may act as sales agent, marketing support office or commissionaire for an overseas principal, earning a commission calculated as a percentage of sales, purchases or another agreed base rather than a trading margin on goods it never owns. Because this payment flows between Related Parties or Connected Persons, Article 34 of Federal Decree-Law No. 47 of 2022 requires it to meet the arm's length principle, and the FTA Transfer Pricing Guide (CTGTP1) sets out the analytical steps for testing it. How this differs from a buy-sell distributor is covered in distribution models and in how UAE distributors should determine arm's length margins.
What exactly is the agent being paid for?
Before any rate is benchmarked, the functional analysis needs to establish precisely what the UAE entity does and does not do. An agent or commissionaire typically does not take title to goods, does not carry inventory risk, and does not bear the credit risk on the end customer — those risks and rewards remain with the principal. Its role is usually confined to introducing opportunities, negotiating within parameters set by the principal, providing local market knowledge, or supporting after-sales relationships.
This is a materially lighter functional and risk profile than that of a full-fledged or even a limited-risk distributor, and it should be tested against comparables with a similarly narrow role. Conflating an agency fee with a distributor's trading margin — or benchmarking an agent against distributor comparables that buy and resell on their own account — is one of the most common errors in this area, because the risk borne (and therefore the expected return) is fundamentally different.
Applying the six-step risk framework to an agency arrangement
The same structured risk analysis used elsewhere in transfer pricing applies here. The economically significant risks in the arrangement — principally market risk, credit risk and inventory risk — need to be identified with specificity, and the intercompany agreement should be checked to see who is said to bear them contractually. The critical test is then whether the party said to bear a risk actually controls it, through the capability to make decisions about it, and has the financial capacity to absorb it if it materialises.
An agent that cannot set the final price, cannot decide which customers to extend credit to, and could not itself absorb a bad debt or an unsold inventory write-off, is not exercising control over those risks or carrying the financial capacity to bear them — which is exactly why it is compensated on a commission basis rather than a trading margin. Documenting this analysis is what supports treating the arrangement as an agency relationship rather than a disguised distribution arrangement for pricing purposes.
Which transfer pricing method fits a commission?
| Method | When it fits |
|---|---|
| Comparable Uncontrolled Price (CUP) | The UAE entity, or a comparable independent agent, earns a commission on economically comparable arrangements with unrelated parties, and the contractual terms, scope of authority and market are sufficiently similar |
| Transactional Net Margin Method (TNMM) | A reliable CUP is not available. Because an agent typically has no cost of goods sold, the profit level indicator is usually a net cost-plus margin (operating profit over the agent's own operating costs) or, less commonly, a margin on the commission income itself |
| Cost Plus Method (CPM) | The arrangement is closer to a fee for a defined support service — for example, market research or lead generation — and the appropriate compensation is a mark-up on the UAE entity's own costs of providing that service |
A worked illustration: commission linked to procurement support
An overseas parent conducts the core business of procurement and sale of goods from its home jurisdiction. It also has a UAE presence that carries out procurement support on its behalf with unrelated suppliers, without ever taking title to the goods or having any entitlement to the amounts the parent later charges its own customers. The parent pays this UAE presence a commission calculated as a percentage of the cost of purchases made on its behalf.
A functional analysis first separates what each side does: the overseas parent sells to independent third-party customers and carries the associated market and credit risk, while the UAE presence performs procurement support only. The commission is then tested by asking what an unrelated UAE-based procurement agent would have to be paid to perform the same support function for an unrelated principal. The arm's length result is the compensation the parent would have had to pay if the procurement support had been carried out by an independent third party rather than its own related presence.
Comparability factors that matter most for a commission benchmark
| Factor | What to test |
|---|---|
| Scope of authority | Can the agent bind the principal or set final terms, or does it operate within a tightly defined mandate? |
| Exclusivity | Is the agent the principal's sole representative in the territory, or one of several? Exclusive arrangements can command a different rate |
| Basis of the commission | Percentage of sales value, percentage of purchase cost, or a fixed fee per transaction — the base itself needs to be comparable, not just the percentage applied to it |
| Risk and cost bearing | Who bears the marketing spend, warranty cost and bad debt risk — the principal or the agent |
| Industry and product | Commission conventions vary materially between, for example, commodity trading, industrial equipment and consumer goods |
Building the arm's length range
Once comparable commission rates or net margins are identified, the same approach applies as for any other Controlled Transaction: the search criteria and any rejected comparables should be documented, comparability adjustments made where reliable data supports them, and statistical tools such as the interquartile range used to narrow the results where a sizeable set of observations is available. How to run that search is in selecting reliable comparables.
Any point within the resulting range is acceptable, but a UAE agent with a genuinely narrow, low-risk mandate would be expected to sit toward the lower end of a distributor-style range, or be benchmarked instead against a specific set of agency and commission comparables where these can be reliably identified.
What documentation should a UAE agent or commission-earning entity keep?
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The agency, representation or commission agreement, including the commission base, rate, exclusivity and scope of authority.
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A written functional analysis confirming the entity does not take title to goods and does not bear inventory, market or credit risk.
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The risk allocation analysis — contractual assumption of risk tested against actual conduct and financial capacity.
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The benchmarking study: method selected and rationale, comparable agents or service providers identified, adjustments made, and the resulting range.
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Evidence that actual commission income for the period falls within the benchmarked range.
For Taxable Persons that meet the thresholds under Ministerial Decision No. 97 of 2023, this material belongs in the Local File. The commission should also be refreshed on the same annual / three-year cadence as other material related-party prices.
Frequently asked questions
Can an agent be benchmarked against distributor comparables?
Only with caution. A distributor takes title to goods and typically bears inventory and credit risk that an agent does not, so distributor margins and agency commissions are not directly interchangeable without adjustment for that difference in functions and risk.
What is the difference between a commission agent and a commissionaire?
Both typically avoid taking legal title to inventory and carry limited risk, but the precise legal and contractual structure — including whether the arrangement creates a taxable presence for the principal — should be reviewed on its own facts alongside the pricing analysis.
Is a flat commission percentage set once for all markets acceptable?
Not automatically. Market conditions, exclusivity and scope of authority can vary by territory, so a single group-wide rate should still be supported by benchmarking that reflects the UAE entity's specific role and market.
Does the commission rate need to be reviewed every year?
The underlying benchmarking study should be refreshed periodically to reflect current comparable data and any change in the UAE entity's functions, assets or risks, even if the contractual rate itself stays the same.
Does the commission still need to be disclosed if the UAE entity never takes title?
Yes, if it is a Related Party or Connected Person payment that meets the applicable disclosure thresholds. Title is a functional fact for method selection, not a reason to omit the transaction from the Related Party schedules.
Primary sources and further reading
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Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses — Article 34
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Related party trading: how UAE distributors should determine arm's length margins
How SBC Tax Consulting can help
SBC's transfer pricing team delineates agency and commissionaire arrangements from distribution, selects CUP, TNMM or cost-plus on the facts, and documents the commission so it can be reproduced in the Local File. Contact SBC before the next rate review or FTA query.
This publication is for general information only and does not constitute professional advice. Please consult your SBC advisor before acting on any matter covered here.