ZATCA Transfer Pricing Phase 2: How Zakat Payers Must Prepare Before the 2027 Threshold Reduction

Saudi zakat payers have a limited window left before the compliance bar drops sharply. Under ZATCA transfer pricing Phase 2, the exemption threshold for Master File and Local File documentation falls from SAR 100 million to SAR 48 million starting in financial years from 2027 onward. That means thousands of businesses currently exempt from full transfer pricing documentation will suddenly need it — and building that documentation properly takes months, not weeks.

This article explains exactly what changes under Phase 2, who it affects, and what zakat payers need to complete before the threshold reduction takes effect. We wrote it in plain language for finance leaders and business owners, not just tax specialists.

Why Transfer Pricing Now Applies to Zakat Payers

Until 2024, Saudi Arabia’s transfer pricing rules mainly targeted income tax payers and mixed-ownership entities. That changed when the Zakat, Tax and Customs Authority (ZATCA) approved amendments to the Transfer Pricing Bylaws in April 2023, extending the rules to zakat payers — including wholly Saudi-owned companies — for fiscal years starting on or after 1 January 2024. ZATCA followed up in November 2023 with detailed guidelines clarifying how related-party transactions should be treated for zakat purposes, and in June 2024 it released the third edition of its Transfer Pricing Guidelines to reflect the expanded scope.

This shift matters because it closed a long-standing gap. Previously, a wholly Saudi-owned company trading with a related party could sit outside transfer pricing scrutiny simply because it paid zakat rather than corporate income tax. Under the current framework, that distinction no longer protects a business from documentation duties once its related-party transactions cross the relevant threshold.

Transfer pricing regulations in Saudi Arabia now rest on the arm’s length principle — the idea that transactions between related parties must reflect what independent parties would agree to under open market conditions. Saudi Arabia recognizes all five OECD-endorsed transfer pricing service methods, including the Comparable Uncontrolled Price method, Resale Price method, Cost Plus method, Transactional Net Margin method, and Profit Split method. ZATCA does not enforce a strict hierarchy among these methods, giving businesses some flexibility in choosing the most appropriate one for their transaction type.

Phase 1 vs Phase 2: What Actually Changes

ZATCA structured zakat payer compliance into two phases, based on the value of a company’s related-party transactions. Understanding exactly where the threshold moves is the core of this entire update.

The key shift is in the middle row. Under Phase 1, a zakat payer with SAR 48 to 100 million in related-party transactions could choose whether to prepare full documentation. Under transfer pricing Phase 2 in Saudi Arabia, that choice disappears — Master File and Local File preparation becomes mandatory once a business crosses SAR 48 million in related-party dealings, regardless of transaction size beyond that point.

This is the ZATCA transfer pricing threshold reduction businesses need to plan around now, not once the 2027 fiscal year begins.

Who Falls Under ZATCA Transfer Pricing Phase 2

Phase 2 affects any zakat payer with related-party transactions at or above SAR 48 million once the new fiscal year threshold applies. This includes:

• Wholly Saudi-owned private companies with related-party dealings above the threshold
• Family-owned groups with intercompany transactions between holding entities and operating subsidiaries
• Mixed-ownership businesses that pay both zakat and income tax on different ownership portions
• Companies with cross-border related-party transactions, including shared services, financing, or royalty arrangements
• Previously exempt investment funds, which lose their Phase 1 exemption once Phase 2 applies

Even companies that stay below the SAR 48 million threshold are not fully off the hook. Every zakat payer, regardless of transaction value, must still file the Transfer Pricing Disclosure Form (CTDF) and obtain an auditor’s affidavit each year. This baseline reporting standard applies across the board, making basic zakat payer transfer pricing awareness necessary for nearly every business with related-party activity.

What Zakat Payers Must Prepare Before 2027

Getting ready for Phase 2 is not a last-quarter task. Documentation of this depth typically takes three to six months to build properly, especially for companies preparing a Master File and Local File for the first time. Here is what needs to happen before the threshold reduction lands.

1. Map All Related-Party Transactions

Start by identifying every transaction with related parties – goods, services, financing, royalties, shared costs, and management fees. Many businesses underestimate how many intercompany transactions they actually run until they map them systematically.

2. Calculate Transaction Value Against the New Threshold

Once transactions are mapped, calculate the total annual value against the SAR 48 million mark. Businesses sitting close to this line should plan for compliance now, since transaction volumes can shift year to year and push a company over the threshold unexpectedly.

3. Build or Update the Local File

The Local File documents specific related-party transactions, the pricing method used, and the supporting financial analysis proving arm’s length pricing. This is the document ZATCA reviews most closely during audits, so it needs solid comparable data and a clearly explained pricing method.

4. Prepare the Master File

The Master File gives a broader picture of the multinational or group structure, including the overall business, group-wide transfer pricing policies, and the allocation of income and economic activity across entities. Groups with multiple related entities in different jurisdictions need this to show consistency across their global structure.

5. Complete the Transfer Pricing Disclosure Form Annually

Regardless of documentation thresholds, the CTDF and auditor’s affidavit are due every year. Businesses should build this into their standard annual compliance calendar rather than treating it as a one-off task.

6. Review Pricing Policies for Arm’s Length Compliance

Documentation only works if the underlying pricing actually reflects arm’s length principles. A benchmarking study comparing intercompany pricing to comparable market transactions is often necessary to defend pricing positions during a ZATCA review.

7. Align Zakat and Tax Reporting Where Mixed Ownership Applies

Mixed-ownership entities need to reconcile transfer pricing positions across both their zakat and tax reporting streams, since inconsistent positions across the two can raise red flags during review.

The Cost of Waiting: What Happens If Businesses Miss the Deadline

Non-compliance with Saudi transfer pricing rules carries real financial consequences. Businesses that fail to prepare required documentation, or that submit incomplete or inaccurate filings, face penalties tied to the Zakat Bylaws and Transfer Pricing Bylaws, alongside potential adjustments to their zakat base. If ZATCA determines that related-party transactions were not conducted at arm’s length, it can disallow expenses that exceed market pricing when calculating zakat-adjusted profits — directly increasing the zakat liability for the year under review.

Beyond direct penalties, companies without proper documentation face a much harder time defending their position if ZATCA opens an audit. Building a Local File and benchmarking analysis after an audit notice arrives is far more stressful, and far less effective, than having it ready in advance.

Why Businesses Should Not Wait Until 2027

Some businesses assume they have time simply because Phase 2 does not take effect until fiscal years starting in 2027. In practice, three factors make early preparation the smarter path:

• Documentation takes time to build properly: A rushed Local File with weak benchmarking data is far more likely to draw ZATCA scrutiny than one built with adequate lead time.
• Transaction volumes change year to year: A business currently under SAR 48 million in related-party transactions could cross the threshold before Phase 2 even begins, especially with business growth or new intercompany arrangements.
• ZATCA’s compliance environment keeps tightening: Between the third edition of the Transfer Pricing Guidelines in 2024 and the ongoing rollout of e-invoicing integration waves through 2026, ZATCA has shown a clear pattern of narrowing exemptions and increasing reporting obligations across the board. Businesses that build strong compliance habits now will adapt faster to whatever comes next.

Firms that treat 2026 as their preparation year, rather than waiting for the 2027 deadline, give themselves room to fix data gaps, run benchmarking studies properly, and avoid the scramble that always accompanies last-minute compliance work.

Transfer Pricing Compliance in Saudi Arabia: Building a Sustainable Process

Transfer pricing compliance in Saudi Arabia works best as an ongoing process, not an annual scramble. Businesses that build durable compliance tend to follow a similar pattern:

• They review related-party transaction values at least twice a year, not just at year-end.
• They keep benchmarking studies updated rather than reusing outdated comparables.
• They document pricing policy decisions as they happen, not months later during a filing deadline.
• They involve finance, legal, and tax teams together, since transfer pricing touches all three areas.
• They work with experienced transfer pricing consultants Saudi Arabia businesses trust, rather than treating documentation as a purely internal exercise.

This approach turns transfer pricing from a recurring deadline crisis into a manageable part of normal financial governance.

How Insights KSA Can Help You

Preparing for ZATCA transfer pricing Phase 2 involves more than filling out a form. It requires accurate transaction mapping, defensible benchmarking analysis, and documentation that holds up under ZATCA review. Insights KSA transfer pricing team works with zakat payers and mixed-ownership businesses across Saudi Arabia to build exactly this kind of readiness.

Our team helps businesses:

• Map and assess related-party transactions against the SAR 48 million and SAR 100 million thresholds
• Prepare Master File and Local File documentation aligned with ZATCA’s Transfer Pricing Guidelines
• Conduct benchmarking studies to support arm’s length pricing positions
• Complete annual CTDF filings and coordinate the required auditor’s affidavit
• Build long-term ZATCA transfer pricing compliance processes that reduce risk year after year

As a trusted name in Insights KSA consultancy, we focus on practical, audit-ready compliance rather than generic templates. If your business is approaching the SAR 48 million threshold, or simply wants to be ready well before the 2027 deadline, our team can build a preparation plan tailored to your related-party structure.

FAQs

What is ZATCA Transfer Pricing Phase 2?

Phase 2 is the second stage of ZATCA’s zakat payer transfer pricing rules, effective for fiscal years from 2027 onward. It lowers the mandatory Master File and Local File threshold from SAR 100 million to SAR 48 million in related-party transactions.

How should zakat payers prepare for transfer pricing Phase 2?

Zakat payers should map related-party transactions now, calculate values against the SAR 48 million threshold, and start building Master File and Local File documentation well before 2027.

How to prepare transfer pricing documentation before 2027?

Start with a full related-party transaction review, run a benchmarking study to support arm’s length pricing, then build the Local File and Master File using ZATCA’s Transfer Pricing Guidelines as the framework.

How does the threshold reduction affect Saudi businesses?

Businesses with SAR 48–100 million in related-party transactions move from optional to mandatory documentation, bringing many mid-sized zakat payers into full compliance scope for the first time.

What happens if businesses fail to meet transfer pricing requirements?

ZATCA can disallow non-arm’s-length expenses when calculating zakat-adjusted profits, increasing zakat liability, and businesses without documentation face a much harder position during any ZATCA audit or review.