Where two parties are closely linked, their relationship may influence any transactions between them. There are rules in place to ensure that these closely linked parties (known as Related Parties) do not manipulate the values of transactions between themselves in order to obtain a Corporate Tax advantage.

 

Related Parties must apply the “arm’s length principle” when entering into a transaction or arrangement with each other. This means that the price of a transaction between Related Parties should be the same as if the transaction had taken place between two unrelated independent parties.203

 

Where the price of the transaction or arrangement between Related Parties is not considered to be at arm’s length, the FTA will adjust the Taxable Person’s Taxable Income to achieve the arm’s length result that best reflects the circumstances of the transaction or arrangement.204

 

If the FTA makes an adjustment to a transaction or arrangement involving a Taxable Person to meet the arm’s length standard, it shall also make a corresponding

 

197 Article 33(4) of the Corporate Tax Law. 198 Article 33(5) of the Corporate Tax Law. 199 Article 33(6) of the Corporate Tax Law. 200 Article 33(7) of the Corporate Tax Law.

201 Articles 33(8) and 47 of the Corporate Tax Law. 202 Article 5(2) of Ministerial Decision No. 115 of 2023. 203 Article 34(2) of the Corporate Tax Law.

204 Article 34(8) of the Corporate Tax Law.

 

adjustment to the Taxable Income of the Related Party that is a party to the relevant transaction or arrangement.205

 

Ministerial Decision No. 134 of 2023 sets out the adjustments that must be made when calculating the Taxable Income from the transfer of an asset or liability between Related Parties.206

If a foreign tax authority makes an adjustment to a transaction or arrangement involving a Taxable Person to meet the arm’s length standard, the Taxable Person can make an application to the FTA to make a corresponding adjustment to its UAE Taxable Income.207

 

A corresponding adjustment is an adjustment to the Corporate Tax liability of a UAE Taxable Person following a primary adjustment made by a foreign tax authority to the taxable base of a Related Party to the UAE Taxable Person, so that the allocation of profits by both jurisdictions is consistent. The purpose of such an adjustment is to prevent double taxation (or double non-taxation) which could arise as a result of the primary transfer pricing adjustment.

 

Related Parties

 

Broadly, a Related Party is an individual or juridical person that has a pre-existing relationship with another Person through ownership, Control or kinship (in the case of individuals). With respect to ownership and Control, it is internationally common to set the related party ownership threshold at 50% or more, on the basis that a simple majority is typically sufficient to exert influence and direction over another entity.

 

Two Persons are considered Related Parties for Corporate Tax purposes if they are:

 

• Two or more natural persons related to the fourth degree of kinship or affiliation, including by adoption or guardianship;208 This would include the following:

o The first-degree of kinship and affiliation includes a natural person’s parents and children, as well as the parents and children of their spouse;

o The second-degree of kinship and affiliation additionally includes a natural person’s grandparents, grandchildren, and siblings, as well as the grandparents, grandchildren, and siblings of their spouse;

 

205 Article 34(10) of the Corporate Tax Law.

206 Article 3 of Ministerial Decision No. 134 of 2023.

207 Article 34(11) of the Corporate Tax Law.

208 Article 35(1)(a) of the Corporate Tax Law and Federal Law No. 5 of 1985 on the Issuance of Civil Transactions Law, and its amendments.

 

o The third-degree of kinship and affiliation additionally includes a natural person’s great-grandparents, great grandchildren, uncles, aunts, nieces and nephews, as well as the great-grandparents, great grandchildren, uncles, aunts, nieces and nephews of their spouse;

o The fourth-degree of kinship and affiliation additionally includes a natural person’s great-great-grandparents, great-great-grandchildren, grand uncle, grand aunt, grandniece, grandnephew and first cousins, as well as the great-great-grandparents, great-great-grandchildren, grand uncle, grand aunt, grandniece, grandnephew and first cousins of their spouse.

 

• A natural person and a juridical person where:

o The natural person, or one or more Related Parties of the individual, are shareholders in the juridical person, and the natural person, alone or together with its Related Parties, directly or indirectly owns a 50% or greater ownership interest in the juridical person; or

o The natural person, alone or together with its Related Parties, directly or indirectly Controls the juridical person.209

• Two or more juridical persons where:

o One juridical person, alone or together with its Related Parties, directly or indirectly owns a 50% or greater ownership interest in the other juridical person; or

o One juridical person, alone or together with its Related Parties, directly or indirectly Controls the other juridical person; or

o Any Person, alone or together with its Related Parties, directly or indirectly owns a 50% or greater ownership interest in or Controls such two or more juridical persons;210 or

• A Person and its Permanent Establishment or Foreign Permanent Establishment;211

• Two or more Persons that are partners in the same Unincorporated Partnership;212 or

• A Person who is the trustee, founder, settlor or beneficiary of a trust or foundation, and the trust or foundation, including the trust’s or foundation’s Related Parties.213

 

For the purposes of determining whether two or more Persons are Related Parties, Control means the ability of a Person, in their own right or by agreement, to influence another Person including through the ability to, among others:

 

• Exercise 50% or more of the voting rights of another Person;214

• Determine the composition of 50% or more of the board of directors of another Person;215

• Receive 50% or more of the profits of another Person;216 or

• Determine, or exercise significant influence over, the conduct of the Business and affairs of another Person.217

 

Connected Persons

 

Payments or benefits provided by a Taxable Person to its Connected Persons are deductible only to the extent that the payment or benefit corresponds with the Market Value of the service or benefit provided by the Connected Person, and where the payment or benefit is incurred wholly and exclusively for the purposes of the Taxable Person’s Business.218

 

For example, an owner of a business will be able to deduct their salary when determining the Business’ Taxable Income but only insofar as this salary corresponds with the Market Value. In order to determine if the value of a service or benefit provided matches its Market Value, the arm’s length principle should be applied.219

 

Connected Persons capture a broader group of Persons than Related Parties. A Connected Person of a Taxable Person is:

 

• A natural person who directly or indirectly owns an ownership interest in, or Controls, the Taxable Person (for example, the individual owner of a limited liability company);220

• A director or officer of the Taxable Person (for example, a Managing Director of a limited liability company);221 or

• A Related Party of either of the above Persons (for example, a son of the owner of a limited liability company).222

 

This limitation does not apply to a company whose shares are traded on a Recognised Stock Exchange, or a Taxable Person that is subject to the regulatory oversight of a competent authority in the UAE.223

 

Example 21: Related Parties, Control and Connected Persons

 

Mr B is a first cousin of Ms C. Mr B owns 75% of B LLC.

Ms C owns 20% of C LLC. She owns preferential shares which entitle her to 60% of the voting rights in C LLC.

 

Ms C is also a partner in an Unincorporated Partnership, JKL Partners. The other partner is a UAE corporation, D Ltd.

 

Mr B and Ms C are Related Parties – they are related to the fourth degree of kinship.

 

Mr B and B LLC are Related Parties – Mr B is an individual who owns more than 50% of the juridical person B LLC.

 

Mr B and C LLC are Connected Persons – Mr B is an individual who is related to Ms C and Ms C owns more than 50% of the voting rights in C LLC.

 

Ms C and C LLC are Related Parties – Ms C is an individual who Controls a juridical person, C LLC, as she holds more than 50% of the voting rights in C LLC.

 

Ms C and D Ltd are Related Parties – they are partners in the same Unincorporated Partnership.

 

B LLC and D Ltd are unrelated juridical persons.

 

Ms C and B LLC are Connected Persons – Ms C is Mr B’s first cousin and Mr B owns 

 

Transfer pricing

 

Transfer pricing rules aim to ensure that the price of a transaction is not influenced by the relationship between the parties involved. In order to achieve this and to avoid artificially profit shifting, the internationally recognised arm’s length principle is used for transactions between Related Parties and Connected Persons. The transfer pricing rules apply to both cross-border and domestic transactions carried out by juridical persons and individuals.