Key Takeaways
- Connected Persons rules in UAE Corporate Tax affect owners, directors, and related parties within the fourth degree of kinship
- Payments to connected persons must meet arm’s length principle and business relevance criteria for tax deductibility
- Disclosure required for transactions above AED 500,000 per connected person in the tax period
- UAE Corporate Tax applies at 0% up to AED 375,000 and 9% above this threshold for most businesses
Overview of UAE Corporate Tax Law
The UAE Corporate Tax Law came into effect on June 1, 2023, marking a significant shift in the UAE’s tax landscape. This federal law applies to all Emirates and introduces a corporate tax system designed to enhance the UAE’s position as a leading global business hub while ensuring compliance with international tax standards.
The law was introduced to align with international best practices, support the UAE’s economic diversification goals, and maintain its competitive advantage in attracting foreign investment. It affects all UAE businesses, from small startups to large multinational corporations, with specific provisions for different entity types and business structures.
Corporate Tax Rates and Thresholds in the UAE
| Taxable Income Range | Tax Rate | Entity Type |
| Up to AED 375,000 | 0% | All taxable persons |
| Above AED 375,000 | 9% | Most businesses |
| All income levels | 15% | Large multinational enterprises |
Who is Subject to UAE Corporate Tax?
The UAE Corporate Tax applies to various types of taxable persons, including:
- UAE Resident Entities: Companies incorporated in the UAE or effectively managed and controlled from the UAE
- Non-Resident Entities: Foreign companies with a permanent establishment or UAE-sourced income
- Free Zone Companies: Subject to specific rules and may qualify for 0% rate under certain conditions
- Unincorporated Partnerships: Where partners are subject to corporate tax
Exempt Income and Exempt Entities
Exempt Income Types:
- Dividends received from UAE resident companies
- Capital gains from disposal of shares and securities
- Income from real estate investments (under specific conditions)
- Income of investment funds meeting qualifying criteria
Exempt Entities:
- Government entities and wholly government-owned entities
- Qualifying investment funds
- Pension and social security funds
- Charitable and public benefit entities
WHY TRANSFER PRICING IS APPLICABLE TO CONNECTED PERSONS?
Transfer pricing (TP) rules apply to Connected Persons in the UAE primarily to prevent tax base erosion. The UAE’s definition of “connected persons,” as outlined in Article 36 of the Corporate Tax Law, is broader than the typical “Related Party” definition found in many other countries. It encompasses not only ownership and control but also close personal and familial ties.
This unique approach is likely due to the absence of personal income tax in the UAE. Without personal income tax, there’s a risk that business owners might try to reduce their corporate tax liability by artificially inflating payments to themselves or individuals connected to them. These excessive payments could be disguised as salaries, bonuses, or other expenses, effectively shifting profits from the taxable business to the individual, where they would escape taxation. Therefore, the FTA mandates a thorough review of transactions with connected persons to ensure they comply with the arm’s length principle and maintain the integrity of the corporate tax base.
CONNECTED PERSONS UNDER THE UAE TAX LAW INCLUDES
- Ownership/Control: An individual who directly or indirectly has an ownership interest in, or controls, the taxable person.
- Director/Officer: A director or officer of the taxable person.
- Kinship with Owner/Director/Office: An individual related to the owner, director, or officer of the taxable person to the fourth degree of kinship or affiliation, including by birth, marriage, adoption, or guardianship.
- Partnership: Where the taxable person is a partner in an unincorporated partnership, any other partner in the same partnership.
- Related Party: A Related Party of any of the Related Parties referred to earlier will also be considered a Connected Person.
IDENTIFICATION OF CONNECTED PERSONS FOR UAE TP PURPOSES
- Article 36 (2)(a): An owner of a Taxable Person refers to any natural person who directly or indirectly holds an ownership interest in the Taxable Person or exercises control over it, including its operations.
- Article 36(2)(b): Director or Officer of the Taxable Person.
- Article 36(2)(c): A Related Party of any of the Persons referred to (a) & (b) mentioned above.
- Article 36(4): Where the Taxable Person is a partner in an Unincorporated Partnership, a Connected Person is any other partner in that same Unincorporated Partnership, and any Person that is a Related Party of that partner.
The provisions of this article shall not apply to any of the following:
- A Taxable Person whose shares are traded on a Recognized Stock Exchange.
- A Taxable Person that is subject to the regulatory oversight of a competent authority in the State.
- Any other Person as may be determined in a decision issued by the Cabinet at the suggestion of the Minister.
Examples of Connected Persons in UAE Corporate Tax
As per the above figure:
- Person A is the sole shareholder of Company A and considered a connected person to Company A.
- Persons A and B are considered related parties as per the UAE CT law because they are relatives within the fourth degree of kinship.
- Person B provides consulting services to Company A.
- Person B qualifies as a connected person to Company A because they are a related party to Person A (i.e., the owner of the business/connected person of Company A).
- Payments from Company A to Person B for consulting services are classified as connected person payments and subject to UAE TP rules.
Real-World Connected Person Scenarios
- Family Business: A UAE trading company owned by a father pays consulting fees to his son who provides marketing services. The son qualifies as a connected person due to kinship.
- Cross-Border Transactions: A UAE subsidiary pays management fees to its German parent company. The parent company is a connected person due to ownership control.
- Partnership Structure: In an unincorporated partnership, all partners are considered connected persons to each other for transfer pricing purposes.
UNDERSTANDING TAX DEDUCTIBILITY FOR PAYMENTS TO RELATED PARTIES AND CONNECTED PERSONS
To qualify for tax deductibility in the UAE, payments or benefits provided to related parties or connected persons must adhere to specific criteria:
|
Criteria |
Requirement |
Common Errors to Avoid |
|
Arm’s Length Principle |
Payments should reflect market value |
Inflated salaries without benchmarking |
|
Business Relevance |
Wholly and exclusively for business |
Personal expenses disguised as business costs |
|
Non-Capital Nature |
Revenue expenses, not capital |
Treating capital expenditure as deductible |
- Arm’s Length Principle: Payments should reflect market value, as if the transactions occurred between independent parties.
- Business Relevance: Expenditures must be wholly and exclusively related to business activities.
- Non-Capital Nature: Costs should not be capital in nature, with certain rules applying to specific expenditures like private pension contributions.
Furthermore, a Need Benefit Analysis must be conducted to substantiate the payments made to CP. Recommended documentary evidence to be maintained includes:
Documentation Checklist for Connected Person Payments
- Contract/agreement for payments to each CP
- Ledgers and workings of such payments
- Reasoning for each type of payment
- Detailed CP Profile as mentioned earlier
- Market benchmarking studies
- Board resolutions approving payments
- Contract/agreement for payments to each CP
- Ledgers and workings of such payments
- Reasoning for each type of payment
- Detailed CP Profile as mentioned earlier
The definition of Payments or Benefits is broad, encompassing:
- Salaries, bonuses, or share-based compensation.
- Employer contributions to private pension funds.
- Loan interest payments.
- Benefits like accommodation, education, or other allowances.
- Any other payments or in-kind benefits tied to employment.
Non-compliance with these rules can lead to denied deductions, increasing taxable income. Such payments might also be taxed at the recipient’s level, potentially resulting in double taxation. Inaccurate identification of related party or connected person transactions may lead to incomplete corporate tax filings or transfer pricing documentation.
For a broader understanding of corporate taxation, refer to our UAE Corporate Tax Guide for Common Citizens.
TP DISCLOSURE FORM AND CONNECTED PERSONS SCHEDULE
This Schedule is required to be completed only if the transaction value meets the below-prescribed threshold:
Applicability & Disclosure Threshold: Aggregate value of transactions with Connected Persons (including their Related Parties) in the Tax Period exceeds AED 500,000.
It is to be highlighted that not all individual transactions with Connected Persons are required to be disclosed here. The Schedule is to be filled for each Connected Person only where the aggregate payment or benefit exceeds AED 500,000 per Connected Person.
Step-by-Step Guide for Completing the Disclosure Form
- Step 1: Identify all connected persons and calculate aggregate transactions
- Step 2: Determine if AED 500,000 threshold is exceeded
- Step 3: Complete separate disclosure for each qualifying connected person
- Step 4: Provide market value analysis and supporting documentation
- Step 5: Submit with corporate tax return by the due date
DISCLOSURE REQUIREMENTS
- 16.2.5 | Value of Payment/Benefit Extended
This field requires the total amount of payment made or benefit provided to the Connected Person during the Tax Period, as recorded in the Financial Statements. In case more than one payment is made to the same Connected Person, separate disclosure is required for each type of payment.
- 16.2.6 | Market Value of service provided by the Connected Persons
This field requires the value of the payment /benefit that would have been made if such Person were not a Connected Person. This value would be identical to that entered in Field 16.2.5 if it is properly demonstrated that the Market Value has been utilized as per Article 36(1) and 36(5) of the CT Law. The difference between the fields 16.2.5 and 16.2.6 will be auto-populated in Field 16.2.7.
Frequently Asked Questions
What is the CT limit in UAE?
The UAE Corporate Tax applies a 0% rate on taxable income up to AED 375,000. Income above this threshold is taxed at 9% for most businesses, with a 15% rate applying to large multinational enterprises meeting specific criteria.
What is the CT threshold in UAE?
The CT threshold in UAE is AED 375,000. This means businesses with taxable income up to this amount pay 0% corporate tax, while income exceeding this threshold is subject to the applicable tax rates.
What is the UAE CT impact assessment?
A UAE CT impact assessment evaluates how the Corporate Tax Law affects your business operations, compliance requirements, and tax obligations. It includes analyzing your entity structure, income sources, connected person transactions, and required documentation to ensure full compliance.
What is Article 30 of the UAE CT law?
Article 30 of the UAE Corporate Tax Law deals with the deductibility of expenses and outlines the general principles for determining which expenses can be deducted from taxable income, including the requirement that expenses must be incurred wholly and exclusively for business purposes.
HOW DOES BCL GLOBIZ SUPPORT YOUR BUSINESS?
We understand the complexities of UAE corporate tax and transfer pricing rules and offer specialized services to ensure your business operates within these frameworks. Here’s how we can support you:
- Review and Alignment of Compensation Policies: We’ll review your existing compensation policies for key management, directors, and other connected persons to ensure they align with UAE tax laws, market benchmarks, and industry best practices. This includes verifying consistent application of these policies throughout your organization.
- Arm’s-Length Payment Determination: Our team specializes in determining arm’s-length payments for connected persons. This crucial step ensures that compensation is justifiable and defensible in the event of scrutiny from tax authorities.
- Compliance Assessment: We’ll assess your internal processes and controls related to compensation and reward frameworks to identify any potential gaps or weaknesses in your compliance posture.
- Documentation Support: We’ll help you create and maintain the necessary documentation to support your compensation policies and demonstrate the rationale behind your payment decisions. This is vital for mitigating potential challenges from tax authorities.
Why Choose BCL Globiz?
- UAE’s leading firm with proven expertise in Corporate Tax and Transfer Pricing
- 100% Refund Guarantee – Not satisfied within the first 3 months? Get your full money back
- Dedicated WhatsApp support for instant communication
- Proven track record with Fortune 500 companies and UAE SMEs
- SOP-driven execution with fast escalations by Managers and Partners
“BCL Globiz made our tax compliance effortless. As a UAE-based SME, their tailored approach saved us time and money.” – Ahmed K., Managing Director
By partnering with BCL Globiz, you can confidently navigate the UAE’s connected person rules, minimize your risk of penalties (read about Penalties under UAE Corporate Tax Law), and optimize your tax position. We’ll help you define related parties and connected persons clearly, implement strong compensation policies, and ensure sustained compliance and operational efficiency. For any queries, you can reach out to us at rakesh@bclglobiz.com.
Also read: Ensure your business complies with the tax law by completing the Corporate Tax Registration process in the UAE.
By Rakesh, Head of Tax Advisory at BCL Globiz
