Transactions with owners, directors, group companies and other closely connected persons require careful treatment under the UAE Corporate Tax rules. A transaction may be commercially genuine, but the amount recognised for Corporate Tax must still satisfy the arm’s length principle and the applicable deduction requirements.

This guide explains who may be treated as a Related Party or Connected Person, how payments should be valued, when transactions must be disclosed in the Corporate Tax Return and what records UAE businesses should retain.

Why Do These Rules Matter?

Where parties are closely linked, their relationship may influence the price or terms of a transaction. UAE transfer pricing rules therefore require transactions and arrangements between Related Parties to reflect the conditions that would have been agreed between independent parties in comparable circumstances.

The rules apply to domestic and cross-border transactions. They can therefore cover dealings with UAE mainland companies, Free Zone entities and overseas parties.

Who Is a Related Party for UAE Corporate Tax?

A Related Party is generally a person connected to another person through ownership, control or family relationships. Depending on the facts, Related Parties can include:

• Companies that are more than 50% directly or indirectly owned by the same person or group of persons
• A company and a person who directly or indirectly owns more than 50% of it
• Persons connected through control, even where the ownership test is not decisive
• A person and its Permanent Establishment or Foreign Permanent Establishment
• Partners in an Unincorporated Partnership
• Natural persons related within the degrees of kinship or affiliation specified in the Corporate Tax Law

The definition must be applied carefully to the complete ownership and control structure. Indirect ownership and interests held together with Related Parties can affect the conclusion.

Who Is a Connected Person?

A Connected Person is different from a Related Party. For UAE Corporate Tax, a Connected Person can include:

• An individual who directly or indirectly owns an interest in, or controls, the Taxable Person
• A director or officer of the Taxable Person
• A Related Party of an owner, director or officer
• A partner in an Unincorporated Partnership and that partner’s Related Parties

Payments or benefits to Connected Persons commonly include directors’ fees, management remuneration, bonuses, benefits provided to owners, rent, interest and other amounts paid for services or the use of assets.

What Is the Arm’s Length Principle?

The arm’s length principle requires a transaction between Related Parties to be priced as if it had taken place between independent parties under comparable circumstances. Businesses should consider the contractual terms, functions performed, assets used, risks assumed, economic circumstances and the commercial purpose of the transaction.

The recognised transfer pricing methods include:

• Comparable uncontrolled price method
• Resale price method
• Cost-plus method
• Transactional net margin method
• Transactional profit split method

A different method may be used where it provides a more reliable arm’s length result and the business can support why the recognised methods were not appropriate.

Are Payments to Connected Persons Deductible?

A payment or benefit provided to a Connected Person is generally deductible only to the extent that:

• It corresponds with the Market Value of the service or benefit received; and
• It is incurred wholly and exclusively for the purposes of the Taxable Person’s Business.

For example, a salary or director’s fee should be supported by the person’s role, experience, responsibilities, time commitment, services performed and comparable market remuneration. Any amount above the supported arm’s length value may require a Corporate Tax adjustment.

The special Connected Person deduction restriction does not apply to a company whose shares are traded on a Recognised Stock Exchange or to a Taxable Person subject to the regulatory oversight of a competent UAE authority. However, other Corporate Tax and transfer pricing requirements may still apply.

Related Party Disclosure in the Corporate Tax Return

The Corporate Tax Return asks whether the Taxable Person had transactions with Related Parties during the Tax Period.

The Related Party Transactions Schedule is required where the aggregate value of all transactions with all Related Parties recorded in the financial statements or at Market Value exceeds AED 40 million for the Tax Period.

Once this threshold is exceeded, each transaction category whose aggregate value with all Related Parties exceeds AED 4 million must be disclosed. The categories include goods, services, intellectual property, interest, assets, liabilities and other transactions. Gross income and expenditure are reported separately. Dividends declared between Related Parties are excluded from these thresholds and from the schedule.

Example

A company has AED 43 million of total Related Party transactions. Its service transactions total AED 5 million, interest transactions total AED 3 million and goods transactions total AED 35 million. The AED 40 million overall threshold is exceeded, so the schedule applies. The services and goods categories exceed AED 4 million and must be disclosed, while the interest category does not exceed that category threshold.

Connected Person Disclosure in the Corporate Tax Return

The Connected Persons Schedule is required when the aggregate value of transactions with Connected Persons, including their Related Parties, exceeds AED 500,000.

The schedule is completed for each Connected Person where the aggregate payment or benefit to that Connected Person, together with their Related Parties, exceeds AED 500,000. The return requests information including the Connected Person’s name, TRN or TIN where available, the nature and value of the payment or benefit, its Market Value and any resulting adjustment.

Disclosure Thresholds Do Not Remove the Arm’s Length Requirement

The disclosure thresholds determine whether the detailed schedules must be completed. They do not mean that smaller transactions can be ignored. The arm’s length and Connected Person deduction rules can still apply even where the AED 40 million, AED 4 million or AED 500,000 reporting thresholds are not exceeded.

What Records Should a UAE Business Maintain?

Businesses with Related Party or Connected Person transactions should retain records that demonstrate the commercial basis and pricing of each material arrangement. Depending on the transaction, these may include:

• Group structure and ownership information
• Related Party and Connected Person registers
• Written agreements, invoices and proof of payment
• Descriptions of services performed and benefits received
• Director or management remuneration approvals
• Loan agreements, repayment schedules and interest calculations
• Comparable market data and benchmarking analyses
• Transfer pricing policies and method-selection support
• Reconciliations to the financial statements and Corporate Tax Return

Businesses that meet the applicable revenue thresholds may also be required to maintain a Master File and Local File. Even where those files are not mandatory, sufficient evidence should be retained to support the arm’s length outcome and the Corporate Tax Return.

Common Risks to Review Before Filing

• Interest-free or unusually priced loans between group entities
• Management fees without evidence of services or benefits
• Owner or director remuneration that is not commercially supported
• Personal expenses recorded as business expenditure
• Related Party balances without written agreements
• Transactions recorded at book value without considering Market Value
• Missing disclosure schedules despite exceeding the relevant thresholds
• Incorrectly assuming domestic UAE transactions fall outside transfer pricing rules

Practical Filing Checklist

1. Identify all Related Parties and Connected Persons.
2. Map all income, expenditure, loans, assets, liabilities and benefits involving those persons.
3. Confirm the commercial purpose and contractual terms.
4. Test whether the pricing is arm’s length.
5. Review whether Connected Person payments are wholly and exclusively for the Business.
6. Calculate the disclosure thresholds using the correct aggregate values.
7. Prepare any required Related Party or Connected Person schedules.
8. Record necessary Corporate Tax adjustments.
9. Retain evidence supporting the pricing and deductions claimed.

How Business Catalyst Consulting Can Help

Business Catalyst Consulting helps UAE businesses identify Related Parties and Connected Persons, review intercompany transactions, assess director and owner payments, prepare transfer pricing support and complete the relevant Corporate Tax Return disclosures.

Read our UAE transfer pricing guide, explore our Corporate Tax services, or contact us to discuss your filing requirements.

Official References

• FTA Corporate Tax Guides, References and Public Clarifications
• FTA Corporate Tax Return Guide
• FTA Transfer Pricing Guide
• FTA FAQ: Who are Related Parties?
• FTA FAQ: Who are Connected Persons?

This article provides general information and should not be treated as legal or tax advice. Each business’s circumstances should be reviewed separately.