When it comes to fiscal reforms, the UAE has undergone noticeable developments in the past few years, especially in the Corporate Tax (CT) regulations. In addition, the UAE transfer pricing rules have undergone several amendments that ultimately highlight the UAE’s proactive approach to aligning practices with international standards and boosting economic growth.

The UAE has stepped forward to comply with the global taxation rules based on the Taxation of Corporations and Businesses (UAE CT Law). The ultimate objective of this law is to establish Corporate Tax (CT) and Transfer Pricing (TP) regulations. Similarly, the Federal Tax Authority (FTA) offered the TP Guide that aligns with the UAE TP provisions and the Organisation for Economic Cooperation and Development (OECD) TP Guidelines for Multinationals and Tax Administrations.

In this article, we will focus on the related parties and the persons connected to UAE CT and TP.

What are Related Parties?

A related party is an entity or an individual that used to have a relationship with a business under the regime of UAE CT in terms of Ownership, Control, or Kinship. For companies, related parties refer to the companies in which the company alone or with a related party has a controlling ownership interest (50 percent or more), or greater than 50% of common ownership.

Purposes of Related Parties for UAE CT & TP 

Below are the purposes of related parties for the Corporate Tax and Transfer Pricing guidelines of the UAE.

Ownership/Control 

A legal entity of an individual alone or together with a related party directly or indirectly owns a 50% or greater share in the company. Similarly, two or more legal entities where one alone or together with a related party owns a 50% greater share. Lastly, two or more legal entities if a taxpayer alone or together with a related party own a 50% share of each or control them.

Branch/PE 

Second, is a taxpayer and its branch or permanent establishment given that they fall under unified ownership and control to make sure that transactions across branches are consistently assessed for transfer pricing UAE corporate tax compliance.

Partnership 

Third counts as partners in the same unincorporated partnership. This ensures that partnerships in these arrangements are considered to acknowledge shared financial interests.

Exempt/Non-exempt business activities 

Exempt and non-exempt business activities of the same person are recognized as related for tax purposes. It ensures compliance with tax regulations by the transfer pricing disclosure form UAE resources between exempt and non-exempt activities.

Kinship (natural persons) 

Two or more individuals related to the fourth degree of kinship or affiliation, including by birth, marriage, adoption, or guardianship are classified as related. It ensures a close familial relationship to avoid the unfair influence of business transactions.

Rules of Related Parties in the UAE

Taxpayers must first identify their linked parties using the definitions given in Article 35 of the UAE CT Law and corporate tax registration guide, which are further expanded upon in the UAE TP Guidelines. It’s important to remember that the UAE TP regulations and the requirements listed in International Accounting Standards (IAS) 24—Related Party Disclosures have different definitions of related parties. Notably, these systems differ in how related parties are recognized and handled. To identify their related parties per UAE TP regulations, companies doing business in the UAE should perform a thorough assessment. Their worldwide TP policies’ definitions and related party declarations in their financial statements shouldn’t be their only sources of information.

Connected Persons For UAE CT & TP Purposes 

UAE has introduced the concept of connected persons or related parties in the CT and TP regulations defined specifically to its tax system and not found in other countries. Considering this, UAE does not impose Personal Income Tax, however individual business owners may be incentivized to reduce their taxable business income by making payments to themselves or closely associated individuals. Therefore the connected persons concept prevents this by making sure that payments are made to certain individuals who are aligned with the market value and serve the business purpose.

Transfer Pricing Recordkeeping and Reporting

The Decree-Law provides comprehensive guidelines for the Transfer Pricing documentation a taxpayer requires to keep a Cabinet Decision to clarify which taxpayers will be affected by the latest requirements. Both the “Master File” and the “Local File,” which are both typical OECD papers, are included in the Decree-Law’s list of documents. Although the Decree-Law states that they must be maintained in a format determined by the FTA, it appears that this format will be very similar to or identical to the OECD guidelines.

The global business activities of the group to which the Taxable Person belongs are often contained in the Master File, which should include details like:

• Organization of groups
• An explanation of the group’s operations
• Intangibles of the Organization
• Intercompany finance agreements
• The Group’s financial and tax situation

Typically, the local file contains:

• Details on the Taxable Person, including business plan and organizational chart, etc.
• Records of significant local transactions that are TP-regulated

The FTA may request these papers at any time, but they are not required to be provided as part of the regular reporting procedure. The taxpayer will then have 30 days to provide the files upon request. The Decree-Law also mentions the potential for a notice or decision to be issued requiring a taxpayer to file a TP disclosure at the time the tax return is filed, in addition to the obligation of maintaining a Master File and a Local File.

Accountax provides services to ensure adherence to TP and CT requirements. We assist you in making sure that payments to directors and important management staff are in line with accepted company procedures and industry standards. Strong controls and procedures, together with contemporaneous TP defense documentation, back the payments. It can be difficult to maintain compliance with the UAE’s transfer pricing and corporate tax laws, but doing so is necessary to prevent fines and obtain tax advantages. Your firm can remain on course by establishing efficient compensation practices and precisely defining linked parties and connected individuals.