The proposed UAE Corporate Tax will have transfer pricing rules which will ensure that the price of a transaction is not influenced by the relationship between the parties involved in the transaction. In view of this, the UAE will apply the Arm’s Length principle to transactions between related parties and with connected persons. Hence the businesses need to identify the related parties to comply with the transfer pricing rules.
Reading this page will give you further insights though we are still waiting for the final release of regulations in this respect.
Who is a Related Party under the UAE Corporate Tax?
Section 7.1 of the public consultation document defines what a related party is under the UAE corporate tax. As per the document, “a related party is an individual or entity who has a pre-existing relationship with a business that is within the scope of the UAE CT regime through ownership, control or kinship (in the case of natural persons).” Elite Chartered Accountants can advise you further on the definition of a related party for the purpose of corporate tax compliance.
How to Identify a Related Party?
There are seven ways to identify as follows:
- Two or more individuals related to the fourth degree of kinship or affiliation, including by birth, marriage, adoption or guardianship.
- An individual and a legal entity where alone, or together with a related party, the individual directly or indirectly owns a 50% or greater share in, or controls, the legal entity
- Two or more legal entities where one legal entity alone, or together with a related party, directly or indirectly owns a 50% or greater share in, or controls, the other legal entity
- Two or more legal entities if a taxpayer alone, or with a related party, directly or indirectly owns a 50% share of each or controls them
- A taxpayer and its branch or permanent establishment
- Partners in the same unincorporated partnership
- Exempt and non-exempt business activities of the same person
Are Connected Persons Same as Related Parties?
Connected persons are not the same as related parties. The UAE has not yet introduced personal income tax in the country. In such a scenario, excessive payments made to the connected persons can erode the taxable income for the UAE corporate tax regime. This means businesses are required to monitor the payments made to connected persons. Payments to the connected persons will be deductible only if the business proves the below aspects:
The payments or benefits are as per the market value of the service provided; and
The payments or benefits are incurred wholly and exclusively for the taxpayer’s business.
How to Distinguish Connected Persons from Related Parties?
The UAE corporate tax regime treats connected persons and related parties differently.
A connected person is:
- An individual who directly or indirectly has an ownership interest in, or controls, the taxable person
- A director or officer of the taxable person
- An individual related to the owner, director or officer of the taxable person to the fourth degree of kinship or affiliation, including by birth, marriage, adoption or guardianship
- Where the taxable person is a partner in an unincorporated partnership, any other partner in the same partnership
- A Related Party of any of the above
You can avail the assistance of Elite Chartered Accountants to understand concepts such as related parties and connected persons under the transfer pricing rules and the tax impact on your transactions.
