Corporate Tax

Related Parties in UAE Corporate Tax Law (2024): Compliance Guide and ALP Insights Introduction

December 31, 2024 Comments Off on Related Parties in UAE Corporate Tax Law (2024): Compliance Guide and ALP Insights Introduction

The introduction of the UAE corporate income tax law focuses on ensuring compliance with rules governing related parties and transactions entered into with them. These rules are fundamental for accuracy and transparency in taxation and to align with global standards including the OECD guidelines.

This guide delves into the role of related parties in the UAE corporate tax law, key compliance obligations, and how businesses should handle related-party transactions to compliant with tax in UAE.

Should you require specialized guidance, Jaxa is well equipped to provide you with tailored support to ease your path toward compliance.

What do you mean by Related Parties or Connected Persons under UAE Corporate Tax?

A Related party can be an individual or juridical person that has a pre-existing relationship with another Person through ownership, Control or kinship (up to 4th degree of kinship in the case of individuals). With respect to ownership and Control, it is internationally common to set the related party ownership threshold at 50% or more, on the basis that a simple majority is typically sufficient to exert influence and direction over another entity.

Any parent company, subsidiary, parties in a joint venture or other immediate family members of the key management personnel (owner(s), director(s) and manager(s) of a company) are included.

Why Are Related Parties Significant for Businesses under UAE Corporate Tax?

The UAE Corporate Tax Law mandates that related-party transactions must comply with the “Arm’s Length Principle” (ALP). This ensures that transaction pricing mirrors that of unrelated parties, preventing profit shifting to low-tax jurisdictions and thereby fostering fair taxation.

Example: If a parent company provides services to its subsidiary, the charges must reflect market rates. This ensures transparency and curbs tax avoidance.

The Corporate Tax Law in UAE also mandates, under certain situations, that businesses must keep Transfer Pricing (TP) documentations to evidence compliance with ALP. Transfer pricing documents include:

  1. Transfer Pricing disclosure form which covers details of the Controlled Transactions during a Tax Period.
  2. Master File which provides a high-level overview of the Group’s business and the allocation of income and economic activity within a Group.
  3. Local File which provides detailed information on operations of the local entity and analysis and testing of the outcomes of the Controlled Transactions against the Arm’s Length Principle.
  4. Country-by-Country Report which provides jurisdictional quantitative information about an MNE Group (above AED 3,150,000,000) as well as an overview of the different activities conducted by affiliates of an MNE Group.

Articles 34 – 36 of UAE Corporate Tax Law: Key Insights

Articles 34 – 36 outlines specific requirements for compliance with ALP and related-party transactions under UAE Corporate Tax Law. On a comprehensive review of these Articles, one can summarize the steps to be undertaken by UAE Businesses as below:

  • Identify related parties and connected persons of the business to understand the exposure.
  • Disclose related-party transactions in their corporate tax returns if it exceeds the specified threshold.
  • Ensure compliance with the ALP to evidence that transactions do not constitute tax avoidance or profit shifting.
  • Carry out Transfer Pricing studies to evidence compliance with ALP.
  • Keep robust documentation to substantiate the pricing strategies applied.

This transparency fosters trust with tax authorities and helps businesses avoid potential audits or penalties.

Why is Compliance with ALP Significant for Businesses under UAE Corporate Tax?

Compliance with ALP in transactions undertaken with Related parties are essential as it help businesses to avoid tax litigations and maintain credibility with taxation authorities.

Key Considerations:

  • Fair transactions minimize disputes and legal challenges.
  • Non-compliance leads to heavy fines, reputational damage, and loss of tax benefits.
  • Aligning with related-party rules supports global trust and promotes economic stability in Dubai.

By prioritizing compliance, businesses contribute to a robust and fair tax system, fostering their own growth and that of the nation’s economy.

Strategies for Managing Related-Party Transactions Effectively

To manage related-party transactions effectively under Corporate Tax in UAE, businesses should:

  • Adopt Proper Documentation: Maintain detailed records of related-party transactions, pricing methods, and justification based on the ALP.
  • Conduct TP Analysis: Evaluate internal pricing against market benchmarks to ensure consistency with ALP.
  • Stay Updated on Guidelines: Dubai tax authorities frequently update regulations, requiring businesses to revise policies accordingly.

Jaxa’s expertise can help streamline these processes, ensuring seamless compliance.

Are UAE Free Zones Excluded from Reporting Related-Party Transactions?

Businesses in UAE Free Zones enjoy unique tax incentives. However, they are not excluded from related-party compliance rules.

  • Free Zone Incentives: Properly structured related-party transactions can help businesses maximize tax benefits.
  • Documentation is Key: Free Zone businesses must conduct TP study and maintain detailed records to justify inter-company pricing.

By adhering to ALP principles, Free Zone entities can protect their tax benefits while ensuring compliance.

Benefits of Understanding Related Parties

Being well-versed in related-party regulations offers several advantages:

  1. Enhanced Tax Compliance: Adhering to ALP ensures fair taxation and reduces litigation risks.
  2. Optimized Tax Planning: Proper management of related-party transactions helps leverage corporate tax benefits, especially in UAE Free Zones.
  3. 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: Stay Compliant and Grow Confidently

Compliance with related-party regulations under UAE Corporate Tax Law is essential for sustainable growth. Businesses must embrace transparency, maintain proper documentation, and adhere to the ALP principle to avoid legal repercussions. To avoid legal consequences, firms must be transparent, provide proper documentation, and embrace the ALP principle. Hence, with this proactive stance, companies can not only take advantage of the tax benefits but also promote economic stability in Dubai.

Need guidance? Let Jaxa simplify your compliance process and help your business thrive!