UAE: Definition of "Related Parties" under Corporate Tax Law

UAE authorities published CIT Public Clarification on “The definition of ‘Related Parties’ where there is a common ownership and/or Control through a Government Entity”.

Issue Defining "Related Parties" in cases of common ownership and/or control through a government entity.

CORPORATE TAX REGULATION IN UAE 

Corporate Tax in the UAE is governed by Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, and its amendments (the "Corporate Tax Law").

ARM’S LENGTH STANDARD REQUIREMENT 

Article 34 of the Corporate Tax Law mandates that transactions and arrangements between related parties must adhere to the arm’s length standard when determining taxable income.

DEFINITION OF RELATED PARTIES 

Article 35 of the Corporate Tax Law defines "Related Parties." Two or more juridical persons can be considered related parties due to common ownership and/or control, whether direct or indirect.

PURPOSE OF CLARIFICATION 

This clarification aims to explain how the definition of "Related Parties" in Article 35 of the Corporate Tax Law applies when common ownership and/or control is through the UAE Federal Government or a Local Government (e.g., Emirate-level government).

SUMMARY 

Common ownership or control by the Federal Government or a Local Government alone does not automatically classify entities as related parties under Article 35 of the Corporate Tax Law.

DETAILED ANALYSIS 

Taxable persons with at least 50% common ownership or control solely through the Federal Government or a Local Government are not considered related parties for the purposes of Article 35.

ILLUSTRATIVE EXAMPLE 

Entities in Group 1 are not considered related parties to entities in Group 2. Therefore, the arm’s length requirement under Article 34 does not apply to transactions between these groups, nor are these transactions subject to transfer pricing documentation requirements.

However, entities within each group are considered related parties. For example:

• Entity 1, Entity A, and Entity B in Group 1 are related parties to each other.

• Entity 2, Entity C, and Entity D in Group 2 are related parties to each other but not to entities in Group 1.

A sale between Entity A in Group 1 and Entity D in Group 2 is not a related party transaction. Conversely, a sale between Entity A and Entity B is a related party transaction.

SOURCE/RECOMMENDED READ: 

• CTP002 - Definition of related parties for GEs - 21 07 2024.pdf (tax.gov.ae)