Understanding related party transitions under UAE tax rules is important for UAE businesses following the introduction of Corporate Tax. Companies regularly have transactions with shareholders, group entities, directors, associates, or related parties. Payments, services, loans, sales, and other transactions between related parties should serve the real economies and be treated in accordance with the Arm’s Length Principle. Under the UAE Corporate Tax legislation, related party transactions must in most cases comply with the conditions the independent parties would have accepted in similar situations.
It is now advisable for companies in Dubai and the rest of the UAE to identify transactions with related parties, scrutinize their pricing, and keep relevant documentation to support their claims. Transfer pricing rules apply to both local and international transactions, including the transactions involving companies that operate in the UAE mainland, Free Zones, or abroad. The review helps companies to determine if they are required to prepare transfer pricing documentation, disclosures, or adjustments when filing Corporate Tax returns.
What Are Related Party Transactions Under UAE Corporate Tax?
Related party transactions refer to dealings between individuals and entities that are subject to the conditions set by the legislation regulating corporate tax in the UAE. Any relationship can arise via ownership, control, partnership or other laws. The concerned parties can include entities with common ownership, controlling shareholders, partners and respective relatives, and every other person related in accordance with the legislation. Related party transactions may include the following examples:
- Management services fees paid among companies related by ownership.
- Loans and other financial dealings between related parties.
- Goods sold and transferred between related companies.
- Services provided between the companies under common ownership.
- Payments made to the shareholders, directors and connected persons.
Why Do Businesses Need to Review Related Party Transactions?
The significance of reviewing related party transactions lies in the fact that the UAE Corporate Tax Law necessitates compliance with the Arm’s Length Principle. It is intended to prevent related parties from taking advantage of their closeness to one another to gain undue price or other commercial benefits. If the pricing of a transaction does not adhere to the Arm’s Length Principle, the FTA has the authority to amend taxable income based on an acceptable arm’s length result. Businesses should therefore consider:
- Whether the transaction has a genuine commercial purpose.
- Whether the agreed price reflects market conditions.
- Whether both parties perform the functions stated in the agreement.
- Whether sufficient records support the transaction.
What Is the Arm’s Length Principle?
The Arm’s Length Principle indicates that related parties including connected people must conduct pricing of their transactions as is applicable to similar operations between independent organizations done under the same circumstances. The assignment of the practice in respect of transactions held among related parties is prescribed in Article 34 of the UAE Corporate Tax Law. FTA claims that transactions involving independent parties are usually subject to market forces, while related parties have more freedom in their dealings. Verifications can be based on:
- Nature of the transaction.
- Functions carried out by each party.
- Assets used.
- Risks undertaken.
- Commercial environment.
- Terms and prices offered in comparable independent transactions.
How Does Article 34 Apply to Related Party Transactions?
According to Article 34, any arrangement or a transaction entered into by Related Parties or Connected Persons should adhere to the principle of arm’s length. Therefore, businesses must decide on reasonable parameters based on the assumption of what independent parties would agree to in similar situations. The principle of arm’s length can be applied to different types of transactions such as the sale of goods and services, intangible assets, and financial transactions.
In case a transaction fails to satisfy the arm’s length requirement, the FTA will be able to change the taxable income of the taxable person to achieve the arm’s length outcome and thus render the transaction valid.
How Does Article 36 Apply to Connected Persons?
Article 36 is concerned with payments or benefits that are offered to Connected Persons as well as the circumstances of their deduction. Companies are responsible for ensuring that any payments made for Connected Persons are actual business related payments and are also in line with market value. Moreover, companies must be able to provide proper documentation to explain the payments. Businesses should review:
- The business purpose of the payment
- The services or benefits received
- The amount paid compared with market value
- Supporting agreements and invoices
- Whether the expense meets applicable deduction requirements
Which Transactions Can Fall Under Transfer Pricing Rules?
Transfer pricing regulations cover more than straightforward transactions between affiliated enterprises. The FTA recognizes transactions involving tangible products, acts of services, intangible assets, money transfers, and transactions involving permanent establishments. Thus, companies must ensure not to limit their analysis to purchases or sales, but to their total dealings with Related Parties or Connected Persons.
| Transaction Type | Example |
| Management Services | A group company charges another company for management support |
| Financial Arrangements | A related company provides a loan to another group entity |
| Goods | One related company sells products to another |
| Business Services | A connected company provides accounting or administrative services |
| Intangible Assets | A related party provides rights to use intellectual property |
Do Transfer Pricing Rules Apply to Domestic Transactions?
Yes, the Transfer Pricing Regulation of the UAE applies not only to cross-border transactions done with Related Parties and Connected Persons, but also to domestic ones. The FTA stated that the rule applies regardless of whether this Other Party is based in the UAE mainland, in a Free Zone, or in a foreign jurisdiction. Thus, companies should not think that before they start dealing with their foreign subsidiaries, the issue of transfer pricing does not concern them.
What Documentation Should Businesses Maintain?
Firms are required to keep records that help them substantiate their dealings with their Related Parties and Connected Persons. Depending on the law, firms may be required to submit the information with their tax return and some firms may even be required to maintain a master file and a local file. Maintaining records throughout the year makes it easier to justify the reason behind their transactions and the pricing of the transactions when submitting the Corporate Tax returns or responding to an FTA request. Key documents are as follows:
- Contracts between related parties.
- Invoices and payment documents.
- Pricing calculations.
- Information about the goods or services provided.
- Supporting market information.
- Transfer pricing analysis.
- Master file and local file when required.
When Is Transfer Pricing Documentation Required?
The need for transfer pricing documentation varies according to the taxpayer’s conditions and applicable limits and conditions. Not all firms have to create a master file and local file. However, all firms are still required to keep appropriate data about related party operations and determine whether they must sufficiently comply with their documentation obligations prior to submitting their Corporate Tax return. The companies must find out if:
- They performed any transactions with related parties and connected persons.
- The relevant criteria are satisfied.
- They need to make any disclosures.
- They have to prepare a master file or a local file.
- They have to carry out any additional pricing analysis.
How Should Businesses Review Related Party Transactions?
Finding compliance issues and spotting risks during the process of Corporate Tax reporting required businesses to carry out a structured review. Businesses should start the review process with identifying their Related Parties and Connected Persons and creating a complete list of relevant transactions. Each transaction needs to be analyzed to establish the commercial purpose, pricing and any required documentation. A practical review can include the following steps:
- Identify related parties and connected persons.
- Create a list of all transactions conducted with them.
- Analyze pricing and commercial terms.
- Investigate market data available.
- Gather documents and agreements related to transactions.
- Review corporate tax reporting and documentation requirements.
What Are the Risks of Incorrect Related Party Transactions?
If Related Party Transactions are not priced properly or documented appropriately, it can lead to Corporate Tax compliance issues. The FTA can make adjustments to taxable income when the arm’s length principle is not met. Also, related party transactions may necessitate the adjustment of taxable income, therefore, it is essential that businesses ensure their books and Corporate Tax computations comply with applicable regulations. Examples of common weaknesses include:
- Unsupported pricing
- Missing contracts
- Incomplete transaction documentation
- Unclear business and economic rationales
- Incorrect corporate tax filing
- Failure to assess documentation requirements
How Can Businesses Prepare for an FTA Review?
A company can help themselves in terms of compliance by reevaluating related party transactions that are included in their Corporate Tax returns. An enquiry regarding the transfer pricing files is included in the Corporate Tax requisition form by the FTA, which shows how crucial it is to consider the documentation requirements.
It is also very advisable that companies maintain well-organised records of transactions and prepare several papers such as contracts, invoices and financial documents that match prices. Regular checking of records will help clarify if the listed transactions require adjustments before the filing is completed.
Do Tax Group Transactions Need Transfer Pricing Compliance?
Transactions conducted within a UAE Tax Group are still exempt from transfer pricing regulations because these transactions cancel each other out when the group’s financial results are consolidated. Nevertheless, an exception can apply in a situation where a member needs to compute its standalone taxable income.For example, to institute tax losses incurred before joining the tax group or after moving out of it. Thus, firms that operate within tax groups should look carefully at a particular situation to understand whether transfer pricing applies or not.
Can Businesses Use an Advance Pricing Agreement?
Companies interested in having more certainty about their arm’s length prices for some transactions may want to pursue an Advance Pricing Agreement (APA). Pursuant to Article 59, an individual may submit an application for an APA to determine the Arm’s Length Price for specific controlled transactions. In particular, the FTA asserts that the APA program is a voluntary instrument that can increase predictability and minimize the chance of transfer pricing disputes. Companies can take advantage of an APA’s many benefits, including:
- More certainty regarding pricing.
- Reduced risk of transfer pricing related disputes.
- Improved compliance planning.
- Clearer requirements regarding documentation.
- Possibility of eliminating the chance of double taxation in specific bilateral matters.
How Can Al Riyady Help With Related Party Tax Compliance?
Al Riaydy provides businesses with assistance in reviewing transactions with related parties and comprehending their responsibilities under UAE Corporate Tax law. Assistance may include identifying associated Related Parties and Connected Persons, conducting reviews of transactions, assessment of arm’s length compliance issues, assistance with preparation of applicable transfer pricing documentation and records. A structured review can also help companies organise supporting records and prepare more accurately for Corporate Tax reporting.
Key Steps for Managing Related Party Transactions
Management begins with identification of all relevant related party arrangements and not only during the time of Corporate Tax return. Businesses have to constantly check ownership structures, intra-group transactions, loans, services, goods, and payments to related parties. In addition, companies should ensure that they keep their records and transfer pricing practices up to date. Key things to monitor include:
- Changes in ownership or control.
- New related party agreements.
- Changes in pricing agreements.
- Lew intra group loans or services.
- Documentation and reporting threshold.
- Corporate tax return requirements.
Conclusion
Understanding Related Party Transactions Under UAE Tax Rules helps businesses apply the Arm’s Length Principle and manage Corporate Tax obligations properly. Companies need to recognize important transactions, keep proper documentation, analyze market oriented pricing, and look into transfer pricing papers. Ongoing evaluations can reduce compliance difficulties and make it possible to meet FTA demands.
