Who is a Connected Person?
According to Article 36 of the Corporate Tax Law, a Connected Person is an individual or entity associated with a Taxable Person, either through ownership, control, or legal/economic affiliation. This includes:
- Owners of the Taxable Person
- Directors or officers of the Taxable Person
- Individuals related to owners, directors, or officers
- Partners in an unincorporated partnership
Related parties of any of the above
What is Market Value?
Market Value refers to the price agreed upon in an arm’s-length transaction between independent and unrelated parties in a competitive market. It ensures that payments or benefits provided to Connected Persons align with fair economic standards.
Deductibility of Payments to Connected Persons
Payments or benefits to Related Parties and Connected Persons are deductible only if they reflect Market Value and are incurred solely for business purposes. This principle ensures that businesses do not inflate expenses to reduce taxable income unfairly. For example:
· Salaries and bonuses paid to owners or directors must align with market rates.
· Payments made for services provided by related parties must reflect genuine business expenses.
Application of the Arm’s Length Principle
The Arm’s Length Principle is crucial for tax compliance. Under Clause 2 of Article 34, transactions between related parties should mirror those between independent parties under similar conditions. This prevents price manipulation and tax avoidance.
Transactions Subject to Connected Person Rules
The UAE tax law covers a wide range of transactions between a Taxable Person and their Connected Persons, including:
- Remuneration: Salaries, bonuses, rent, dividends, and interest on loans.
- Business Restructuring: Transfer of shares, assets, and changes in business structures.
- Financing Arrangements: Intra-group loans and guarantees.
- Goods & Services: Purchase, sale, and transfer of goods and services.
- Tangible & Intangible Property: Transactions involving real estate, equipment, intellectual property, and royalty payments.
Corporate Tax Return – Connected Person Schedule
Businesses must complete the Connected Person Schedule in their Corporate Tax Return if transactions with Connected Persons exceed AED 500,000 in a tax period. Required details include:
- Name of the Connected Person
- Corporate Tax TRN/TIN (if available)
- Payment or benefit category
- Description of services provided
- Total value of payments/benefits as recorded in financial statements
- Market value of the service or benefit
- Automatic system adjustments for transactions with Connected Persons
Exemptions from Connected Person Rules
The provisions do not apply to:
- Taxable Persons whose shares are publicly traded.
- Businesses regulated by a competent authority in the UAE.
- Other cases as determined by the Cabinet based on Ministerial recommendations.
Conclusion
Understanding and adhering to the Connected Person rules is crucial for businesses in the UAE. Compliance with the Arm’s Length Principle and proper documentation of transactions will ensure smooth tax filing and avoid penalties. If your business engages in transactions with related parties, ensure you meet the Market Value requirements to stay compliant with the UAE Corporate Tax Law.
