The Article 34, 35, and 36 of the Federal Decree Law No. 47 of 2022 outlines the rules governing transactions between related parties and connected persons. This helps to ensure that transactions with related parties and connected persons are conducted on fair market terms, and also to verify if any artificial arrangements are made that could distort taxable income.
The provisions describe the Arm’s Length Principle, related parties and control, and provide conditions for the deductibility of payments to connected persons. The rules for such transactions are designed by applying globally accepted transfer pricing methods and enforcing market value standards, in order to promote fairness, transparency, and compliance in the tax procedures.
Article 34 – Arm’s Length Principle
As per the Arm’s Length Principle, any transaction or arrangement made between related parties should be based on the conditions that would be agreed upon between independent parties in similar circumstances.
Here are the accepted Transfer Pricing Methods aligned with OECD guidelines for the treatment of corporate tax:
- Comparable Uncontrolled Price Method
- Resale Price Method
- Cost-Plus Method
- Transactional Net Margin Method
- Transactional Profit Split Method
The taxable person may adopt another method, if none of the prescribed methods can reasonably be applied, provided it gives a result consistent with Arm Length rules.
The choice or application of the transfer pricing methods should be made by considering the most reliable method and the following factors:
- Contractual terms of the transaction or arrangement.
- Characteristics of the transaction or arrangement.
- Economic circumstances in which the transaction is made.
- Functions performed, assets used, and risks assumed by the related parties.
- Business strategies of the related parties.
The Federal Tax Authority will assess whether the income and expenditure arises from the related-party transactions meet the Arm’s Length Standard and the chosen transfer pricing method is appropriate
The application of the transfer pricing method may yield a range of arm’s length financial results or indicators acceptable for establishing arm’s length results by the Federal Tax Authority.
If the result of the transaction falls outside the acceptable range, then the Authority may adjust the taxable income to reflect the best arm’s length position.
Adjustments will be made based on information provided by the taxable persons.
If the taxable income of one party is adjusted, then the related party’s income will also be adjusted in order to avoid double taxation or omission.
If a foreign tax authority makes adjustments to a transaction involving a UAE taxpayer to meet arm’s length standards, the UAE taxpayer may apply for a corresponding adjustment to its taxable income.
Article 35 – Related Parties and Control
This article defines the Related Parties and clarifies the concept of Control under the Corporate Tax Law.
The following categories are considered as “Related Parties”:
Natural Persons – Two or more individuals related within the fourth degree of kinship or affiliation, including relationships established through adoption or guardianship.
Natural and Juridical Person Relationship – Where a natural person, alone or with related parties of a natural person, holds at least 50% (fifty percent) ownership in a juridical person, or exercises control over it.
Juridical Persons – Where one juridical person, alone or with related parties are shareholders holding at least 50% of another juridical person, or exercises control over it or where the same person (with related parties) holds or controls 50% or more in two or more entities.
- A person and its establishment or foreign permanent establishment.
- Two or more persons who are partners in the same unincorporated partnership.
- A trustee, founder, settlor, or beneficiary and their related parties.
Control refers to ownership of a person on another person, such as the following:
a) Having 50% or more of the voting rights of another person.
b) Having control over determining the composition of 50% or more of the Board of directors of another Person.
c) Receive 50% or more of the profits of another person.
d) Having control over determining, or exercising significant influence over, the conduct of the Business and affairs of another Person.
Article 36 – Payments To Connected Persons
Any payment of benefit provided by the taxable person to a connected person is deductible under UAE corporate tax law if they are done as per the market value and wholly incurred for the business purposes.
The following category persons are considered as connected persons:
- The owners of the taxable persons
- The directors or officers of the taxable persons
- Persons related to any of the above persons
The owner of the business is any individual holding an ownership interest or exercising control, either directly or indirectly on the business.
If the taxable person is in an unincorporated partnership, then the connected persons are any other partner and their related parties are connected persons.
There are certain categories for which the connected person rules does not apply:
- Entities listed on a recognised stock exchange.
- Entities subject to regulatory oversight by a competent UAE authority.
- Any other category specified by Cabinet decision.
These rules for transactions with related parties and connected persons ensure such transactions are conducted under fair market conditions, preventing the manipulation of taxable income through non-commercial financial arrangements.
This chapter gives clarity on the scope of application for related parties, control, and connected persons and the transfer pricing principles ensure alignment with international tax standards.
It is crucial for all businesses to review all related-party and connected-person transactions, and ensure proper documentation of transfer pricing methods, to calculate taxable income to meet the arm’s length standard to remain compliant and avoid tax adjustments.
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