Understanding Related Parties and Connected Persons Under UAE Transfer Pricing Rules

The introduction of the UAE Corporate Tax regime has brought transfer pricing compliance into sharp focus for businesses operating across the Emirates. One of the most commonly misunderstood aspects of the UAE Corporate Tax Law is the distinction between Related Parties and Connected Persons.

While both concepts are designed to prevent tax avoidance and ensure transactions are conducted at fair market value, they apply to different types of relationships and have different compliance implications.

For UAE businesses, understanding these definitions is essential for accurate tax reporting, transfer pricing documentation, and avoiding penalties.

Under Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses and Ministerial Decision No. 97 of 2023 regarding Transfer Pricing, taxable persons are required to assess transactions involving Related Parties and Connected Persons and ensure compliance with the Arm’s Length Principle.

In this guide, we explain the difference between Related Parties and Connected Persons under UAE Corporate Tax and Transfer Pricing regulations.

Why Do These Definitions Matter?

The UAE Corporate Tax Law requires certain transactions between related entities and individuals to comply with the Arm’s Length Principle, meaning transactions should be priced as if they were conducted between independent parties.

The Federal Tax Authority (FTA) may review these transactions to ensure that profits are not artificially shifted or manipulated to reduce tax liabilities.

Misclassification of parties can lead to:

• Incorrect Corporate Tax filings
• Transfer Pricing adjustments
• Additional tax liabilities
• Penalties for non-compliance
• Increased scrutiny from the FTA

What Are Related Parties?

A Related Party relationship exists when two or more persons or entities have a degree of ownership, control, influence, or family connection that could affect the terms of transactions between them.

Under UAE Corporate Tax rules, related parties may include:

1. Individuals Related Through Family

The following individuals are generally considered related:

• Spouse
• Parents
• Children
• Siblings
• Grandparents
• Grandchildren

The UAE Corporate Tax Law contains specific definitions of relatives and family relationships that should be carefully reviewed when assessing Related Party status.

2. Companies Under Common Ownership

Entities may be related when:

• One company directly or indirectly owns another.
• Both companies are owned by the same individual or group.
• There is significant influence or control over decision-making.

3. Partnerships and Their Owners

Relationships may exist between:

• A partner and the partnership.
• Partners within the same partnership.
• Partners and entities controlled by them.

4. Trusts, Foundations and Beneficiaries

Relationships can arise between:

• Trusts and beneficiaries
• Foundations and founders
• Trustees and related entities

Examples of Related Parties

Example 1: Parent and Subsidiary

Company A owns 100% of Company B.

Any transaction between Company A and Company B is considered a related-party transaction and must comply with transfer pricing requirements.

Example 2: Common Ownership

An individual owns:

• 80% of Company X
• 75% of Company Y

Transactions between Company X and Company Y are generally treated as related-party transactions.

Example 3: Family-Owned Businesses

Two businesses owned by brothers may fall within the related-party rules if ownership and control thresholds are met.

Example 4: Management Fees

A UAE parent company charges management fees to its subsidiary for accounting, HR, strategic planning, and administrative support services. The charges must reflect actual services provided and be supported by an arm’s length analysis.

Example 5: Interest-Free Loans

A shareholder provides an interest-free loan to a related company. The tax implications should be reviewed to determine whether the arrangement reflects arm’s length conditions and complies with UAE Transfer Pricing requirements.

What Are Connected Persons?

The concept of Connected Persons is separate from Related Parties and primarily applies to transactions involving the owners and management of certain taxable businesses.

Connected Persons generally include individuals who have a direct connection with a taxable person and may receive payments that could reduce taxable profits.

These may include:

• Owners of a business
• Directors
• Partners
• Officers
• Persons related to owners or directors

Connected Person provisions generally apply to taxable persons that are not subject to specific exemptions under the UAE Corporate Tax Law. The applicability of these rules depends on the nature of the taxable person and the transaction involved.

The Connected Person provisions aim to prevent excessive payments from being deducted as business expenses when they are not commercially justified.

Key Purpose of Connected Person Rules

The UAE Corporate Tax Law seeks to ensure that payments made to connected individuals are:

• Genuine business expenses
• Commercially reasonable
• Comparable to market conditions

If payments exceed market value, the excess amount may be disallowed as a tax deduction.

Examples of Connected Person Transactions

Example 1: Director Remuneration

A company pays a director AED 2 million annually despite similar market roles paying AED 500,000.

The FTA may determine that a portion of the payment is excessive and disallow the excess deduction.

Example 2: Rent Paid to a Business Owner

A business owner leases personal property to their company at significantly above-market rates.

The FTA may adjust the deductible amount to reflect market value.

Example 3: Consultancy Fees

A shareholder charges substantial consultancy fees without evidence of services performed.

The deduction may be challenged and adjusted.

Transfer Pricing Disclosure Thresholds in the UAE

Under current UAE Transfer Pricing requirements, businesses should carefully monitor their Related Party Transactions and Connected Person Transactions.

A Taxable Person may have disclosure obligations where:

• Aggregate Related Party Transactions exceed AED 40 million during the tax period.
• A single category of Related Party Transaction exceeds AED 4 million during the tax period.
• Connected Person Transactions exceed AED 500,000 during the tax period.

These thresholds are particularly important because they determine disclosure requirements and may trigger additional Transfer Pricing compliance obligations.

Related Party vs Connected Person: Key Differences

How Transfer Pricing Applies to Related Parties

Where transactions occur between Related Parties, businesses must ensure compliance with the Arm’s Length Principle.

Common transactions include:

Sale of Goods

Products sold between group companies should be priced in accordance with arm’s length conditions that would apply between independent parties under comparable circumstances.

Intercompany Services

Management fees, technical services, and administrative support charges must reflect market value.

Loans and Financing

Interest rates on related-party loans should align with commercial market conditions.

Intellectual Property

Licensing fees and royalty arrangements must be supported by economic analysis.

Documentation Requirements

Businesses may be required to maintain transfer pricing documentation that demonstrates compliance.

While all Related Party Transactions should comply with the Arm’s Length Principle, the requirement to prepare a Local File and Master File depends on the thresholds prescribed under UAE Transfer Pricing regulations.

Key documentation may include:

Local File

Details of local related-party transactions.

Master File

Overview of the multinational group structure and operations.

Transfer Pricing Analysis

Evidence supporting arm’s length pricing.

Supporting Agreements

Contracts, invoices, and commercial documentation.

Maintaining proper records is essential in the event of an FTA review or audit.

FTA Audit Red Flags and Risk Areas

The Federal Tax Authority may pay closer attention to:

• Large management fees between related entities
• Interest-free loans
• Excessive director remuneration
• Rental payments above market value
• Unusual year-end adjustments
• Lack of supporting agreements
• Significant transactions between family-owned businesses

Addressing these risks proactively can reduce the likelihood of transfer pricing disputes, tax adjustments, and penalties.

Common Mistakes UAE Businesses Make

Many businesses inadvertently create compliance risks by:

Assuming Family Businesses Are Exempt

Family-owned enterprises often fall within related-party rules.

Ignoring Director Payments

Compensation paid to owners and directors may be subject to Connected Person provisions.

Lacking Documentation

Without supporting documentation, businesses may struggle to justify transaction pricing.

Using Informal Arrangements

Verbal agreements between related entities can create significant compliance issues.

Not Reviewing Existing Structures

Historical arrangements may not comply with current Corporate Tax requirements.

Best Practices for UAE Businesses

To remain compliant:

• Identify all Related Parties and Connected Persons.
• Review transactions regularly.
• Benchmark pricing against market conditions.
• Maintain written agreements.
• Keep detailed supporting documentation.
• Conduct periodic transfer pricing reviews.
• Seek professional tax advice before implementing group transactions.

How German Fintax Consultancy Can Help

At German Fintax Consultancy, we assist UAE businesses in navigating transfer pricing and corporate tax requirements with confidence.

Our services include:

• Related Party Mapping
• Connected Person Reviews
• Transfer Pricing Disclosure Support
• Transfer Pricing Policy Development
• Local File Preparation
• Master File Preparation
• Benchmarking Studies
• Arm’s Length Testing
• FTA Audit Defence Support
• Corporate Tax Return Review
• Corporate Tax Compliance Reviews

Our experienced tax professionals help businesses minimize compliance risks while meeting all UAE Corporate Tax obligations.

Conclusion

Although the terms Related Party and Connected Person are often used together, they serve different purposes under UAE Corporate Tax law.

Related Party rules focus on ensuring that transactions between connected entities or individuals are conducted at arm’s length, while Connected Person rules focus on preventing excessive deductions through payments made to owners, directors, and other associated individuals.

Understanding the distinction is critical for businesses seeking to maintain compliance, avoid penalties, and establish robust transfer pricing practices in the UAE.

As the UAE tax landscape continues to evolve, proactive planning and professional guidance remain essential for successful Corporate Tax compliance.

Frequently Asked Questions (FAQs)

What is a Related Party under UAE Corporate Tax?

A Related Party is an individual or entity connected through ownership, control, family relationships, or significant influence that may affect transaction terms.

What is a Connected Person?

A Connected Person generally refers to owners, directors, partners, and certain related individuals who receive payments from a business that may affect taxable profits.

Are all Related Party transactions subject to Transfer Pricing rules?

Generally, related-party transactions must comply with the Arm’s Length Principle and may require disclosure and documentation depending on the circumstances.

What is the AED 40 million threshold under UAE Transfer Pricing?

Taxable Persons whose aggregate Related Party Transactions exceed AED 40 million during a tax period may have additional disclosure and compliance obligations under UAE Transfer Pricing regulations.

What is the AED 500,000 Connected Person threshold?

Connected Person transactions exceeding AED 500,000 during a tax period may need to be disclosed in the Corporate Tax Return and should be supported by commercial justification and arm’s length principles.

Can salaries paid to directors be challenged by the FTA?

Yes. If compensation exceeds what would be paid under comparable market conditions, the FTA may disallow part of the deduction.

Do family-owned businesses need Transfer Pricing documentation?

Potentially yes. Family relationships can create Related Party connections, making transfer pricing compliance relevant.

What happens if a business does not comply with Transfer Pricing requirements?

Non-compliance may result in transfer pricing adjustments, penalties, increased tax liabilities, and additional scrutiny from the FTA.

How can German Fintax Consultancy assist?

German Fintax Consultancy provides comprehensive transfer pricing, corporate tax, documentation, benchmarking, and compliance support for UAE businesses.