Transfer pricing in EU free zones

03 November 2025 ●

Free zones in the EU can offer businesses lower tax rates (e.g. import duties, VAT, or other charges) or other incentives, but there is one important catch: transfer pricing rules still apply in full.

No matter where you operate, the arm’s-length principle (ALP) is the cornerstone of transfer pricing. It requires that transactions between related parties, whether for goods, services, loans, or intellectual property, be priced as if they were between independent businesses.

The EU, like the OECD, makes it clear that there are no free passes for free zones. If prices are not arm’s length, tax authorities can and will adjust profits. In practice, that means you could lose the benefit of your free zone rate and face normal corporate tax plus penalties. For example, in Poland penalties can reach 30% of the underpaid tax.

In short: a 0% free zone rate can quickly become full taxation if transfer pricing is not managed carefully.

High-risk transactions in free zones

Not every transaction is equally risky. Across the EU, tax authorities pay special attention to:

Intra-group services such as HR, IT, finance, or legal support. These must be charged fairly and reflect real value.
Financing arrangements like loans within a group, especially low or no-interest loans.
Intellectual property (IP) transfers, royalties, or licensing deals.
Goods trading between free zone entities and other group companies, which must include an appropriate margin.

Shared services or cost-sharing agreements also get a lot of scrutiny. Without clear contracts and evidence that costs are allocated fairly, these arrangements can easily be challenged.

Documentation and agreements are essential

For large multinational groups the EU requires a three-tiered approach to documentation:

Master file covering global operations and policies.
Local file with details of local operations, intercompany transactions and benchmarking.
Country-by-country report (CbCR) summarizing profits, taxes, and activities in each country.

Even smaller free zone businesses are expected to keep solid documentation. That means functional analyses, benchmarking studies, and written intercompany agreements that clearly explain the pricing, party’s rights and obligations of each transaction. If you do not have this ready when the tax authority asks for it, you are at a much higher risk of receiving adjustments or penalties.

Common mistakes to avoid

Several pitfalls come up again and again in free zones:

Misallocating costs, such as charging global or group-wide expenses entirely to a free zone entity without showing the benefit.
Selling goods at cost, leaving all the profit with the affiliate instead of sharing returns appropriately.
Overlooking permanent establishments (PEs), which must be treated as separate businesses with their own functions, assets, and risks.

Each of these can trigger a tax adjustment that wipes out your free zone advantage.

Why a proactive approach pays off

The best way to protect free zone benefits is to build a proactive transfer pricing strategy. That means:

Reviewing all related-party transactions regularly.
Making sure contracts and documentation are up to date.
Using benchmarking to show prices are at arm’s length.
Considering an advance pricing agreement (APA) for long-term certainty.

A proactive approach shows regulators that your free zone presence reflects real business substance, not just tax planning. It also helps avoid disputes and keeps incentives intact.

Free zones in the UAE

If you’re interested in understanding how similar principles apply in the UAE or want guidance on structuring and managing transfer pricing in UAE free zones DP Taxation Consultancy can help. Based in the UAE, the firm offers multidisciplinary expertise across corporate tax, international tax, VAT, transfer pricing, and more, combining legal insight with technology-driven solutions tailored to complex free zone environments.

The bottom line

Transfer pricing compliance is not optional in EU free zones. The same rules that apply across the EU also apply inside free zones, and failing to follow them can turn a tax break into a tax headache.

By keeping documentation in order, avoiding common mistakes, and staying proactive, businesses can both preserve their free zone incentives and build trust with tax authorities.