The UAE Corporate Tax has brought in a sea change to the taxation system for the companies in Dubai and other Emirates in the UAE. Among the various new concepts, the one with most prominence and holds a high risk potential for tax litigations is the concept of related parties What are related parties under UAE Corporate Tax? How does it impact the businesses? We explore these topics below.
What are Related Parties under UAE Corporate Tax?
Under the UAE Corporate Tax Law, Related parties are juridical person (companies/legal entities) or natural persons (individuals) connected to another natural person or a juridical person. These connections can take many forms including ownership, control, or family ties.
Article 35 of the UAE Corporate Tax Law defines related parties and nature of relationships that constitutes related parties. In broad terms below are the types of related parties and relationships:
Natural Persons (Individuals):
- Two or more natural persons related to the fourth degree of kinship or affiliation, including by adoption or guardianship. This would include the following:
- The first-degree of kinship and affiliation includes a natural person’s parents and children, as well as the parents and children of their spouse;
- The second-degree of kinship and affiliation additionally includes a natural person’s grandparents, grandchildren, and siblings, as well as the grandparents, grandchildren, and siblings of their spouse;
- The third-degree of kinship and affiliation additionally includes a natural person’s great-grandparents, great grandchildren, uncles, aunts, nieces and nephews, as well as the great-grandparents, great grandchildren, uncles, aunts, nieces and nephews of their spouse;
- The fourth-degree of kinship and affiliation additionally includes a natural person’s great-great-grandparents, great-great-grandchildren, grand uncle, grand aunt, grandniece, grandnephew and first cousins, as well as the great-great-grandparents, great-great-grandchildren, grand uncle, grand aunt, grandniece, grandnephew and first cousins of their spouse.
- A natural person and a juridical person where:
- The natural person, or one or more Related Parties of the individual, 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; or
- The natural person, alone or together with its Related Parties, directly or indirectly Controls the juridical person.
- 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
Juridical Persons (companies and other legal entities):
- Two or more juridical persons where:
- 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; or
- One juridical person, alone or together with its Related Parties, directly or indirectly Controls the other juridical person; or
- Any 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.
Who are Connected Persons under UAE Corporate Tax?
Connected persons are similar to related parties who may or may not fall within the relationships specified as above but are defined by the Article 36 of the UAE Corporate Tax Law. The following are connected persons identified by the Corporate Tax in UAE:
- An owner of the Taxable Person.
- A director or officer of the Taxable Person.
- A related party of the persons specified above.
Similar to related parties, transactions entered into by businesses with connected persons hold a special treatment under UAE Corporate Tax Law. In this article when we mention related parties it also means connected persons.
Why Are Related Parties Important in UAE Corporate Tax?
Related parties require special attention under UAE Corporate Tax. Identifying related parties and monitoring transactions with them is critical for maintaining tax compliance in Dubai. Here’s why it matters:
- Reporting Obligations: Related parties must be specifically identified and reported under the UAE Corporate Income Tax regulations.
- Transfer Pricing Compliance: Transactions with related parties have to comply with transfer pricing regulations in order not to become susceptible to manipulation.
- Avoiding Penalties: Incorrect reporting of related party transaction may trigger audits, heavy fines and even serious penal actions.
Knowing the definition of the concept of related parties can assist organizations in minimizing compliance risk while doing business with certainty under Dubai’s tax laws. It is imperative for taxable persons to consult with FTA approved tax agent in Dubai to get right advices.
The following examples explain how related party classification applies to different business setups in Dubai.
- Family-Owned Businesses: A business owned by siblings or their spouses is a related party due to the family relationship.
- Connected Firms: Companies that have more than 50% of shareholding are connected firms and thus affect their tax returns.
- Free Zone Enterprises: Companies operating in free zones and eligible for 0% UAE Corporate Tax are mandatorily required to maintain transfer pricing documentations and ensure accurate disclosure in their UAE Corporate Tax return to avoid penalties.
What Should Businesses Do About Related Parties?
To remain compliant, businesses must actively manage related party transactions. Here’s how:
- Identify and Monitor: Related parties of the business should be correctly identified and monitored to understand the exposure.
- Maintain Accurate Records: Document all relationships and transactions involving related parties.
- Follow Reporting Rules: Submit detailed reports on related party transactions to tax authorities.
- Adhere to Transfer Pricing: Ensure pricing aligns with market standards to avoid tax disputes.
- Expert Tip: Collaborating with specialists like JAXA Chartered Accountants can simplify these processes, ensuring compliance with Dubai Corporate Tax regulations.
Advantages of Familiarity with Related Parties
Being well-versed in related-party regulations offers several advantages:
- Enhanced Tax Compliance: Adhering to ALP ensures fair taxation and reduces litigation risks.
- Optimized Tax Planning: Proper management of related-party transactions helps leverage corporate tax benefits, especially in UAE Free Zones.
- Reduced Audit Risks: Transparent and well-documented practices minimize the likelihood of tax authority scrutiny.
Understanding related parties equips businesses to navigate complexities confidently while fostering growth.
Conclusion
The management and understanding of related parties are crucial in keeping businesses compliant with the UAE Corporate Tax laws in 2024. Businesses must maintain accuracy, adhere to the transfer pricing regulations, and assure precise reporting. Engaging with tax consultants in Dubai like JAXA Chartered Accountants facilitates adherence to these regulations, allowing businesses to concentrate on growth with confidence.
Navigating tax laws is not easy, but with proper guidance, your business can remain competitive while growing in Dubai’s market.
