A Complete Guide to Related Parties in under UAE Corporate Tax Law (2024)
The concept of related party transactions has been very important for businesses operating in the UAE and has just become critical in the ever-changing UAE corporate taxation landscape. Specific obligations and considerations apply under Corporate Tax Law when dealing with a related party starting from 2024. This detailed guide will help you to understand related party relationships and how these are taken into consideration for tax purposes.
Understanding Related Parties: The Fundamentals
Related parties are defined by the UAE Corporate Tax Law through the different kinds of relationships the parties can be in, such as: between a natural person, companies and entities. In essence, a related party relationship exists where one party is able to control or significantly influence the other party in making financial or operational decisions.
Example: If one company owns 50 percent or more of another company, they are related parties per the law. That is, if one person or group of people controls several business entities, they will be related for the tax effect.
Key Related Party Relationships Under UAE Tax Law
The Corporate Tax Law recognizes several types of relationships that amount to related party relationships. Family members who have business relationships such as spouses, children, and parents are considered related parties. Also, the partnerships between individuals and companies in which substantial control exists are classified under this category. The companies should not forget about the indirect relations either. For example, when Company A owns 50% of Company B and Company B owns 50% of Company C, then Companies A and C are related parties though there is no direct ownership relationship between them.
Transfer Pricing and Documentation Requirements
Transfer pricing is one of the crucial problems in related party transactions. There are rules in the UAE Corporate Tax Law that say all deals between related parties must be at arm’s length. Because of this, prices are set in a way that is similar to how they would be between strangers in the same situation. The companies are supposed to maintain full documentation that will support their transfer pricing policy. This involves: Detailed records of how transfer prices were determined Comparable market data supports the pricing methodology. Documentation of any special circumstances affecting the pricing decisions. The tax authorities may request this documentation during audits, making it essential to maintain proper records throughout the tax year.
Impact on Business Operations
Understanding the related-party rules can help not just simple sales of goods and services, but even much more complex dealings, like the licensing of intellectual property and the plans for finance.
For instance, where a UAE company provides management services to its subsidiary, the service fees must be determined at arm’s length pricing, and the parties must support with documentation that justifies such pricing. Similarly, loans granted between related parties should attract interest rates that reflect the prevailing market rates.
Compliance and Reporting Requirements
Law on Corporate Taxations, on its part, prescribes the definite manner of reporting these related party transactions. An organization must disclose the relationships that they deem themselves to have with related parties along with their transactions in returns and substantiate these in case they become an issue. The repercussions will be in the form of financial penalties and heightened scrutiny from authorities. Besides the above effects, incorrectly pricing such transactions intra-entity can lead to revisions and thereby higher taxation than perceived.
Risk Management and Best Practices
For organizations to effectively monitor related party transactions, they should put in place good internal controls and procedures. Some of these are regular reviews of related party relationships and transactions, pricing methodology and market comparables, internal rules on related party transactions, and regular training for staff who deal with related party transactions. It is also desirable that companies seek professional advice with the view to appropriately structuring complex related-party arrangements to meet legal requirements.
Looking Ahead: Future Developments
As the UAE tax landscape continues to mature, related party regulations are bound to see further refinement. Companies should keep themselves updated on any change in the law and their practice conform to such change. The tax authorities may also publish guidance on more detailed issues in respect of related party transactions, especially where the issues involved are complex, such as those concerning intellectual property and financing arrangements.
Conclusion
Understanding the relationship with related parties and their proper management under the UAE Corporate Tax Law is very important. In this regard, the companies can ensure proper documentation of transactions, arm’s length pricing, and adequate compliance procedures in order to fulfill the requirements while minimizing tax risks.
This is going to become important for UAE businesses that have to keep up with requirements about related parties, sometimes seeking professional advice to make sure that, in 2024 and thereafter, the taxes are complied with successfully. Related party policies and procedures reviewed and updated from time to time will support ongoing compliance with an ever-evolving tax landscape.