A practical story about group recharges, tax risk and the importance of getting the sequencing right

A UK company, an Italian operating business and a UAE management entity can look, at first sight, like a perfectly sensible commercial structure.

The UK company may hold contracts, intellectual property, customer relationships or senior management. The Italian company may have the people on the ground, the local client base and the operational substance. The UAE entity may have been created for regional expansion, commercial development, access to investors, or the management of Middle East opportunities.

Then, at year end, someone asks the obvious question: “How do we recharge the costs?”

A spreadsheet is prepared. Salaries, travel, marketing, software, office costs and director time are allocated across the group. The UAE entity invoices Italy. The UK company invoices the UAE. Italy recharges part of the operational team’s time back to the UK. The group accountant calls them “management charges” or “cost recharges”. Everyone assumes that, because the costs are real, the recharges must be acceptable.

That is often where the transfer pricing problem begins.

The invoice is not the evidence

Intra-group management charges are one of the most common areas of transfer pricing challenge. HMRC’s own guidance identifies significant management or service fees paid to affiliates as a transfer pricing risk indicator. The key questions are not simply whether the cost was incurred or whether an invoice exists. The questions are whether the recipient would have paid an independent third party for the same service, whether the service gave commercial value, and whether the amount charged was arm’s length.

This distinction matters. A cost recharge is not automatically deductible because it is labelled as a recharge. A management fee is not automatically arm’s length because it equals someone’s salary cost. A 5%, 7% or 10% mark-up is not automatically correct because it appears in another group’s policy or because “that is what everyone does”.

Transfer pricing starts with the actual transaction. What was done? By whom? For whose benefit? Under whose control? Who assumed the risk? Who used the output? Who would have paid for it if the companies were independent?

Only then can the group decide whether the charge should be cost only, cost plus, a fixed service fee, a royalty, a commission, a profit split or, in some cases, no charge at all.

A familiar example: three countries, one group, unclear value

Consider a group with three entities.

The UK company is owned and managed by the founder. It negotiates strategic relationships, supervises finance and controls group policy. The Italian subsidiary employs technical staff and performs delivery work for European clients. The UAE company has been set up to develop Gulf opportunities, employ regional business development staff and contract with local customers.

During the year, the founder spends time on all three businesses. The Italian finance team supports group reporting. The UAE team introduces potential clients to the Italian technical team. The UK company pays for software used across the group. At year end, the UK company recharges “management support” to Italy and the UAE. The UAE company recharges “business development support” to Italy. Italy recharges part of its technical team costs to the UK.

The numbers may look reasonable. The commercial story may even be broadly true. But for tax purposes, the story is incomplete.

The UK tax authority may ask why the UK company’s profits have been reduced by charges paid to a lower-tax jurisdiction. The Italian tax authority may ask whether the Italian company has received a real benefit from the UAE management fee, and whether the documentation supports a deduction under Italian transfer pricing principles. The UAE Federal Tax Authority may ask whether the related-party charges involving the UAE entity comply with the arm’s length principle and whether the UAE company has appropriate transfer pricing documentation. UAE transfer pricing rules apply to related-party and connected-person transactions, and the UAE Ministry of Finance has confirmed documentation requirements, including master file and local file obligations where relevant thresholds are met.

The same invoice can therefore create three different questions in three different jurisdictions.

The “benefit test”: would an independent business have paid?

For intra-group services, the first technical question is usually whether a service has actually been provided. HMRC’s guidance, reflecting the OECD Transfer Pricing Guidelines, focuses on whether intra-group services have been provided and what the arm’s length price should be. The service must have value to the recipient, and the price must be one that an independent party would have been prepared to pay.

This is often called the benefit test.

A UK parent company preparing consolidated accounts may be performing a shareholder activity. That may benefit the shareholder rather than the subsidiaries. In that case, charging the subsidiaries may be inappropriate.

A UAE company introducing a genuine customer opportunity to the Italian business may be providing a valuable commercial service. In that case, a charge may be appropriate, but the method and quantum need to be tested.

An Italian operations team supporting a UK contract may be providing technical services. A cost-plus method may be suitable, but only if the functions, risks and comparables support it.

The practical point is straightforward: every category of recharge needs a reason. Not a tax reason, but a commercial reason.

Cost plus is not a shortcut

Many groups default to cost plus. Sometimes this is correct. Sometimes it is simply convenient.

For low value-adding intra-group services, the OECD framework allows a simplified approach in appropriate cases. HMRC guidance describes these services as supportive in nature, not part of the group’s core profit-earning activity, not involving unique and valuable intangibles, and not involving substantial risk. Where the simplified approach applies, documentation should identify the nature of the services, the benefits received, the allocation keys, contracts and calculations; HMRC guidance also refers to a 5% mark-up for qualifying low value-adding intra-group services.

That is helpful, but it is not a universal safe harbour for every management charge.

Business development, strategic direction, contract negotiation, use of brand, use of intellectual property, financing support, senior entrepreneurial decision-making and risk control may fall outside low value-adding services. The more valuable the function, the less comfortable it is to treat the charge as a simple back-office recharge.

Equally, some costs should be passed through without a mark-up. Others may require a mark-up. Others may require a different method altogether. The answer depends on the facts.

Italy: documentation and deductibility risk

For Italian companies, the issue is not limited to whether the charge is commercially reasonable. It is also whether the Italian taxpayer can defend the deduction during an Agenzia delle Entrate review.

Italy’s transfer pricing framework is based on Article 110, paragraph 7, of the TUIR, and the 14 May 2018 Ministerial Decree introduced guidelines for applying the arm’s length principle in line with international transfer pricing standards.

Italian documentation discipline is also important. The Italian rules on “documentazione idonea” are designed to allow the tax authority to verify whether related-party prices comply with the arm’s length principle and, where properly prepared and disclosed, may provide penalty protection in respect of transfer pricing adjustments.

This is particularly relevant for UK–Italy–UAE structures because the Italian company may be the entity claiming the deduction. If it receives a management charge from the UAE, the Italian file should be able to explain why the service was needed, why it was not duplicated locally, why the allocation key is appropriate, and why the pricing is arm’s length.

A generic intercompany agreement is rarely enough.

UAE: the new discipline around related-party pricing

The UAE is no longer a jurisdiction where groups can assume that related-party pricing will be ignored. The UAE Corporate Tax regime includes transfer pricing rules and documentation requirements. The Federal Tax Authority has issued a Transfer Pricing Guide, and the Ministry of Finance has confirmed that transfer pricing documentation requirements are intended to ensure that taxpayers can prove the arm’s length basis for transactions with related parties and connected persons.

For groups using a UAE entity as a management, regional headquarters or business development company, this changes the risk profile.

A UAE company should not be treated merely as an invoicing hub. It needs substance consistent with the functions it claims to perform. If it charges a UK or Italian company for management services, it should be able to show the people, decision-making, costs, outputs and commercial benefit behind that charge.

Conversely, if significant value is being created in the UAE but no reward is allocated there, that may also create a transfer pricing issue.

UK: transfer pricing, PE and DPT reform increase the need for discipline

The UK has also been modernising its transfer pricing, permanent establishment and diverted profits framework. HMRC published finalised legislation in November 2025, with reforms applying for chargeable periods beginning on or after 1 January 2026. The reforms include changes to transfer pricing, permanent establishment rules and the repeal of standalone Diverted Profits Tax while retaining essential features through a new corporation tax charging provision for unassessed transfer pricing profits.

For UK groups, the message is clear: HMRC is continuing to focus on whether profits are aligned with economic activity. Management charges, cost recharges and cross-border service fees are not administrative afterthoughts. They are part of the profit allocation architecture of the group.

A UK company paying significant fees to a UAE affiliate, or receiving limited reward while UK personnel control key decisions, should expect questions. The same applies where UK directors or senior employees are effectively managing foreign entities from the UK, creating possible corporate residence or permanent establishment concerns.

The real problem is often sequencing

Many transfer pricing problems are created not by bad faith, but by bad sequencing.

The group creates entities first. It hires people second. It signs contracts third. It raises invoices fourth. Only later does someone ask whether the pricing is defensible.

The better sequence is the opposite.

First, map the business model. Then identify where the functions, assets and risks sit. Then decide what each company should be rewarded for. Then draft the intercompany agreements. Then raise invoices consistent with the policy. Finally, maintain contemporaneous documentation showing what actually happened.

That sequencing matters because tax authorities do not test labels. They test conduct.

If the agreement says the UAE company provides strategic management, but all strategic decisions are taken in London, the agreement may not help. If the Italian company is described as a routine service provider, but it controls the technical know-how, client delivery and operational risk, the pricing may be wrong. If the UK company is said to provide only back-office support, but the founder is actually creating the group’s commercial value, the reward may be understated.

Practical red flags

Management charges between UK, Italy and UAE should be reviewed carefully where any of the following features are present:

The charge reduces the payer’s taxable profits to a very low level or a loss.

The fee is paid to a lower-tax jurisdiction without clear evidence of substance.

The same service appears to be performed locally and centrally.

The allocation key is based on turnover, headcount or costs without explaining why that measure reflects benefit.

The charge includes shareholder costs, acquisition costs, investor reporting or group governance costs.

The mark-up is applied mechanically without analysing whether the service is low value-adding.

The intercompany agreement was signed after the year end or does not match actual conduct.

The UAE entity is used as a regional hub but does not have people or decision-making capacity proportionate to the fees charged.

The Italian company claims deductions without local transfer pricing documentation capable of supporting the benefit received.

These are precisely the areas where a tax authority may move from asking for explanation to proposing an adjustment.

What a defensible policy should include

A robust transfer pricing policy for management charges should normally include a functional analysis of each entity, a clear description of the services, evidence of benefit to each recipient, a pricing method, the cost base, any excluded costs, the mark-up rationale, allocation keys, written agreements, invoices, working papers and year-end true-up mechanics.

For UK–Italy–UAE groups, the policy should also consider withholding tax, VAT or indirect tax treatment, deductibility rules, UAE Corporate Tax disclosure, Italian penalty protection documentation and UK corporation tax reporting.

The objective is not to create paperwork for its own sake. The objective is to ensure that the group’s tax position can be explained coherently if challenged.

A well-prepared file should be able to answer a simple question: if these companies had been independent, would they have agreed to this arrangement?

Conclusion: cost recharges are commercial evidence, not accounting housekeeping

In a cross-border group, management charges are not just year-end accounting entries. They are evidence of how the group believes value is created and shared.

Between the UK, Italy and the UAE, that evidence will be read by tax authorities through different domestic rules but broadly the same international lens: substance, benefit, arm’s length pricing and documentation.

The groups that manage this well do not wait until the audit starts. They review the structure before the invoices are raised. They align legal agreements with actual conduct. They identify which services are genuinely low value-adding and which are more strategic. They document the allocation keys before the numbers are challenged. They ensure that tax follows the business model, not the other way around.

For internationally mobile businesses, especially owner-managed groups operating between the UK, Italy and the UAE, this is not simply a compliance exercise. It is a governance issue.

A cost recharge may look harmless. But if it moves profit across borders without a defensible commercial and transfer pricing rationale, it can quickly become the point where an efficient structure turns into a tax dispute.

How Vectigalis Tax can assist

Vectigalis Tax advises UK and international groups on cross-border tax structuring, transfer pricing risk and HMRC-defendable positions. We assist clients in reviewing management charges, cost recharge models, intercompany agreements and the tax sequencing of UK–Italy–UAE structures.

Where appropriate, we work alongside the client’s accountants, legal advisers and overseas tax teams to produce a practical action plan: what should be charged, by whom, on what basis, and with what supporting documentation.

The right question is not whether a recharge can be booked. The right question is whether it can be defended.

Website: www.vectigalistax.co.uk

Maii: info@vectigalistax.co.uk