UAE Corporate Tax regime of transactions between related parties
This section sets out the proposed treatment under the UAE Corporate Tax regime of transactions between related parties.
The UAE CT regime will have transfer pricing rules to ensure that the price of a transaction is not influenced by the relationship between the parties involved. In order to achieve this outcome, the UAE will apply the internationally recognized “arm’s length” principle to transactions and arrangements between related parties and with connected persons.
Related Parties
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).
There are different rules for determining whether parties involved in a transaction are considered “Related Parties” for UAE CT purposes. These are summarized below.
| Table [2]: Related parties for UAE CT purposes |
| 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 |
Connected Persons
The absence of personal income taxation in the UAE can generate incentives for individual owners of taxable businesses to erode the UAE CT base by making excessive payments to themselves or persons connected with them.
The absence of personal income taxation in the UAE can generate incentives for individual owners of taxable businesses to erode the UAE CT base by making excessive payments to themselves or persons connected with them.
- corresponds with the market value of the service provided; and
- Is incurred wholly and exclusively for the purposes of the taxpayer’s business.
Connected Persons are different from Related Parties. A person will be considered as ‘connected’ to a business that is within the scope of the UAE CT regime if he or she is:
| Table [3]: Connected Persons |
| 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 (see Table 2) |
Arm’s length principle
All Related Party transactions and transactions with Connected Persons will need to comply with transfer pricing rules and the arm’s length principle as set out in the OECD Transfer Pricing Guidelines.
In order for a transaction or arrangement between Related Parties or with a Connected Person to meet the arm’s length standard, the results of the transaction or arrangement must be consistent with what the results would have been if they had been between parties that are not related to each other.
The arm’s length price will need to be determined using one of a set number of internationally recognized transfer pricing methods, or a different method where the business can demonstrate that the specified methods cannot be reasonably applied to determine an arm’s length result.
The arm’s length price will need to be determined using one of a set number of internationally recognized transfer pricing methods, or a different method where the business can demonstrate that the specified methods cannot be reasonably applied to determine an arm’s length result.
Transfer pricing documentation requirements
Where relevant, the business will be required to submit a disclosure containing information regarding their transactions with Related Parties and Connected Persons.
A business will also need to maintain a master and local file (with format and content consistent with the requirements prescribed under OECD BEPS Action 13) where the arm’s length value of their Related Party transactions exceeds a certain threshold in the relevant tax period.
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News Courtesy: Public Consultation Document UAE Corporate Tax