Transactions with Related Parties and Connected Persons Under Corporate Tax in UAE

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

 A related party is an individual or juridical person who has a relationship with another person through ownership, control, or kinship (in the case of individuals). Setting the related party ownership threshold at 50% or more is universal concerning ownership and control because a simple majority is typically sufficient to exert influence and direction over another entity.  Two Natural Persons are considered Related Parties for Corporate Tax purposes if they are: 

• Parents, children including parents and children of their spouse, are related parties for a Natural Person. 

• Grandparents, Grandchildren, siblings as well as Grandparents, Grandchildren, siblings of their spouse are a related party for a Natural Person. 

• Great-grandparents, great-grandchildren, uncles, aunts, nieces, nephews, and great-grandparents, great-grandchildren, uncles, aunts, nieces and nephews of their spouse are related parties of a Natural person. 

 A Juridical person and a Natural Person are related if: 

• The natural person, or one or more Related Parties of the natural person, 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. 

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

 A Juridical Person and another Juridical person are related if: 

• 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. 

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

• Any Other 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. 

• A Person and its Permanent Establishment or Foreign Permanent Establishment are related parties. 

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

• 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 

 Meaning of Control: 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 

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

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

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

Payments/benefits made to a connected person shall equal the market value of the service or benefit provided by the connected person. The arm's length principle shall be used to determine the value of the service/ benefit.  Connected person includes: 

• A natural person who directly or indirectly owns an ownership interest in, or Controls, the Taxable Person. 

• A director or officer of the Taxable Person 

• A Related Party of either of the above Persons 

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

Navigating the complexities of Related Parties and Connected Persons in the corporate world is challenging. Our exploration revealed that maintaining fairness and transparency, guided by rules like the 50% ownership threshold and control concept, is crucial for preventing unfair advantages in Corporate Tax. 

In conclusion, careful regulation calibration is essential for a corporate environment where transactions are legal, fair, transparent, and reflect genuine market dynamics.