UAE Intercompany Guarantees: When to Charge a Fee

Usually, yes. A parent or group entity that stands behind a UAE company's bank facility is providing something with real economic value: a lower interest rate and easier access to credit than the UAE company could get on its own. Under Article 34 of Federal Decree-Law No. 47 of 2022, that benefit is a Related Party transaction like any other, and where it is provided for free, the FTA can expect it to be priced at an arm's length guarantee fee.

A corporate guarantee is easy to treat as a formality — a signature that helps a related entity get a loan approved — rather than as a transaction with a price. UAE groups routinely have a parent, holding company or well-rated sister entity guarantee a subsidiary's bank facilities, lease obligations or supplier terms. Once that guarantee is in place, the borrower is getting a real financial benefit: cheaper credit, a bigger facility, or credit it could not have obtained standing alone. The FTA Transfer Pricing Guide (CTGTP1) and OECD financial-transactions guidance expect that benefit to be identified, valued and, in most cases, charged for. How this sits next to interest-free related-party loans is a related question.

Why would a guarantee need a fee at all?

An unrelated guarantor does not put its balance sheet behind another company's debt for nothing. It takes on credit risk — if the borrower defaults, the guarantor pays — and independent guarantors are compensated for that risk through a fee, typically expressed as a percentage of the guaranteed amount. When a related party provides the same undertaking for free, the UAE borrower has received something of value without paying for it, which is the same substance as an interest-free loan or a free service: a related-party benefit that the arm's length principle expects to be priced.

Does every intercompany guarantee need to be charged?

No, and this is where the analysis gets genuinely technical. OECD-aligned guidance draws a line between a guarantee that provides a real, measurable benefit and passive association, sometimes called the shareholder-activity or implicit-support argument: the idea that a subsidiary's credit rating is already lifted simply by being part of a strong group, independent of any specific guarantee. Where that implicit support already explains most of the improved borrowing terms, a formal guarantee may add little incremental benefit, and a lower fee, or in limited cases no fee, can be defensible. The key question is always the same: what is the measurable financial benefit, if any, that the explicit guarantee itself adds on top of group membership?

How is an arm's length guarantee fee actually calculated?

Two approaches are most commonly used.

The yield approach compares the interest rate the borrower obtained with the guarantee against the rate it would have obtained on a stand-alone basis, using its own credit rating. The difference, or part of it, represents the value the guarantee added and can be shared between guarantor and borrower.

The cost approach, closer to a comparable uncontrolled price method, looks at what independent guarantors — such as banks issuing letters of guarantee — charge for comparable credit protection.

Both approaches depend on being able to estimate a credible stand-alone credit rating for the UAE borrower, which is often the hardest part of the exercise and the part most likely to be challenged. The search for reliable comparables is covered in selecting comparables for UAE transfer pricing.

What situations carry the most risk?

The highest-risk files are usually the quiet ones: an explicit parent guarantee sitting behind a UAE bank facility with no fee and no analysis; a UAE company guaranteeing a related party's debt for nothing; a guarantee that improved pricing between a Qualifying Free Zone Person and a mainland related party; and guarantees put in place at financing stage and never revisited. Letters of comfort need the same substance test — a non-binding awareness letter is not the same as a legally binding guarantee, but the label is not conclusive.

Does the direction of the guarantee matter?

Yes. A UAE company that receives a guarantee from a related party is the one benefiting, and the question is usually whether it should be paying a fee to the guarantor. A UAE company that provides a guarantee for a related party is taking on credit risk on behalf of the group, and the question runs the other way: should it be receiving a fee for the exposure it has assumed? Both directions fall within Article 34, and both should be reviewed. It is easy to focus only on fees paid and overlook a UAE guarantor that is quietly absorbing risk for free.

How should a UAE company document an intercompany guarantee?

A written guarantee agreement identifying the guarantor, the borrower, the guaranteed facility and its limit.
The stand-alone credit assessment used to estimate what the borrower could have obtained without the guarantee.
A benchmarking analysis showing how the fee, or the absence of a fee, was determined.
Evidence of the actual interest rate or credit terms obtained with the guarantee in place.
An assessment of whether implicit group support already explains part of the benefit.
Board or treasury approval recording the commercial rationale for providing or accepting the guarantee.
A short written conclusion on whether a fee applies and how it was quantified.

For Taxable Persons that meet the thresholds under Ministerial Decision No. 97 of 2023, this material belongs in the Local File.

Does this affect Qualifying Free Zone Person status or interest limitation rules?

It can. An unpriced guarantee that improves a mainland or Free Zone related party's borrowing terms shifts value between the two entities without an offsetting fee, which can raise the same substance and arm's length questions as any other unpriced related-party benefit, including for a Qualifying Free Zone Person's 0% eligibility. Separately, where a guarantee fee is paid, it typically forms part of the borrower's financing cost and should be considered alongside net interest expense when applying the general interest deduction limitation.

Who should review intercompany guarantees?

Treasury, tax and whoever negotiates group banking facilities. Treasury knows which entities are guaranteeing which facilities; tax knows that this is a priced Related Party transaction; and the banking relationship team can usually confirm what pricing benefit the guarantee actually delivered. Guarantees are often set up once, at financing stage, and then forgotten — which is exactly why they tend to surface, unpriced and undocumented, when the FTA reviews related-party transactions years later.

Frequently asked questions

Is a letter of comfort the same as a guarantee for this purpose?

Not necessarily. A legally binding guarantee is more likely to require a fee than a non-binding letter of comfort or awareness, but the substance of the commitment matters more than its label.

Can implicit group support mean no fee is due at all?

In some cases, yes, where the group's existing standing already explains the borrowing benefit and the explicit guarantee adds little on top. This still needs to be analysed and documented, not simply assumed.

Does a small guarantee still need to be priced?

Yes. There is no minimum transaction value below which the arm's length principle stops applying, though the depth of documentation can be proportionate to the size and risk of the guarantee.

Should a UAE company providing a guarantee for a related party charge a fee?

It should be assessed the same way as receiving one: if the UAE guarantor is taking on real credit risk, an independent guarantor would typically expect to be paid for it.

How does a guarantee fee interact with the interest limitation rules?

A guarantee fee paid to a related party generally forms part of the borrower's financing cost and should be factored in when testing net interest expense against the 30% EBITDA limitation.

Primary sources and further reading

How SBC Tax Consulting can help

SBC's transfer pricing team maps group guarantees, separates implicit support from an explicit credit commitment, and documents whether a fee is due and how it was quantified. Corporate tax specialists then keep the same facts consistent with interest limitation and Free Zone eligibility. Contact SBC before the next facility renewal 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.