According to the Corporate tax Law, any transactions carried out with the related parties should be subject to the arm’s length principle under the transfer pricing regulations. A transaction or arrangement meets the arm’s length standard if it results in the same effect as arising from a similar transaction or arrangement or similar circumstances between two unrelated persons.
Thus, understanding the meaning of related party definition as per Article 35 of the Federal Corporate tax law is of paramount importance. The definition of a related party for UAE Corporate Tax (CT) is quite broad. Here’s a breakdown of who can be considered a related party:
- When do two Natural Persons become related Parties?
Two or more natural persons (individuals) who are connected within the fourth degree of kinship or affiliation shall be regarded as ‘related parties’. This includes people related to you by blood or adoption or guardianship up to the fourth degree of kinship.
- When is a Natural Person and Juridical Person considered ‘Related Parties’?
The two shall be considered ‘related parties’ if they fulfil either ownership or control criteria. The individual and the juridical person shall be regarded as related party of each other if:
- Such individual or his related parties are shareholder in the juridical person and the former, alone or together with his related parties, directly or indirectly own 50% or greater ownership interest in the juridical person.
Example-
- John holds 75% stake in XYZ LLC. Since he is a natural person and owns more than 50% stake in XYZ LLC, John and XYZ LLC are considered related parties.
- In continuity to point i. if John holds 20% stake and its related party XYZ LLC holds 40% stake in another LLC by name ABC LLC, together along with its related party, John holds more than 50% ownership in ABC LLC, hence John and ABC LLC become related parties.
- Such individual, alone or together with his related parties, directly or indirectly controls the juridical person.
Where control means,
- 50% or more voting rights
- Although a shareholder holds less than 50% ownership in the company, through the shareholding agreement he may be provided with an ability to exercise the voting right to the extent of 50% or more, thus, he would have control over other persons.
- Determination of 50% or more composition of the board of directors
- If Mr. Mark can determine the composition of 50% of the Board of directors of Company PQR, then he has control over the Company PQR, thus, Mark and Company PQR are considered related parties.
- Ability to exercise 50% or more profits
- If Mr. Mark has ability to receive 50% or more of the profits of Company PQR, then he has control over the Company PQR, thus, Mark and Company PQR are considered related parties.
- Ability to exercise significant influence.
- If Mr. Mark has ability to determine the conduct and affairs or exercise significant influence on the conduct and affairs of Company PQR, then he has control over the Company PQR, thus, Mark and Company PQR are considered related parties.
- When are two Juridical Person considered ‘Related Parties’ to each other?
The two juridical persons shall be considered ‘related parties’ if they fulfil either ownership or control criteria.
- One juridical person, alone or together with its related parties, directly or indirectly own 50% or greater ownership interest in the other juridical person.
Example-
- ABC LLC holds 75% stake in XYZ LLC. Since the shareholding is 50% or above, ABC LLC and XYZ LLC are considered as related parties.
- One juridical person, alone or together with its related parties, directly or indirectly controls the other juridical person.
Example-
- ABC LLC has the ability to determine 50% composition of the board of directors of XYZ LLC. Since ABC LLC has control over XYZ LLC, ABC LLC and XYZ LLC are considered as related parties.
- If any person, alone or together with its related parties, directly or indirectly owns a 50% or more ownership interest in or controls such two or more juridical persons, then both the juridical persons shall be considered as related parties.
Example-
- Company Q holds 75% stake in Company P and 90% stake in Company R. Since, Company P and Company R are commonly owned by Company Q, they are considered related parties to each other.
- Person and its permanent establishment (PE) or foreign establishment
A person and its permanent establishment would be considered as related parties. If the non-resident has a PE in UAE, the PE in UAE and other branches/offices of the same person outside UAE would be considered as related persons.
If resident of UAE has a PE in outside UAE, then such resident and its foreign PE shall be considered as related parties.
Example-
- ABC LLC, incorporated in UAE has branches in USA and Malaysia. The respective foreign branches and ABC LLC are considered related parties.
- Partners of Unincorporated Partnership
Both natural person and juridical person can form an unincorporated partnership. Each such partner shall be considered as related party to the other.
Example-
- Amar, Akbar & Antony have formed an unincorporated partnership. Since they are partners of an unincorporated partnership, all the three are considered related parties to each other.
- The trustees, founders, settlors or beneficiary of trust or foundation and their related persons shall be considered as related parties of the trust or foundation.
Example –
- Allen formed a trust by name Snow White Foundation. Allen, and his related parties would be considered as related parties to the trust.
Due to the complexity of tax regulations and the unique nature of each situation, it’s essential to consult with a qualified tax professional. We, at BCL Globiz provide personalized guidance and ensure you have the most up-to-date information to make informed decisions.
