Transfer Pricing – Related Parties and Connected Persons

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Overview

The UAE Corporate Tax Law, effective from 1 June 2023, enforces transfer pricing (TP) provisions and related documentation. Recently, the Federal Tax authority (FTA) issued the Transfer Pricing Guide[1] elaborating various concepts of transfer pricing (TP). In this write-up, we have explained the significance of TP and elaborated on one of the concepts of TP study – “related parties” and “connected persons”.

Significance of Transfer Pricing

TP provisions aim to ensure that transactions between related parties reflect fair market prices, preventing the manipulation of profits for tax advantages. These provisions enforce the use of arm's length prices (ALP), which are prices that would be charged in comparable transactions between unrelated entities.

Applicability of TP Rules

The guide provides that the TP rules apply to transactions or arrangements between persons who are -

(i) Related Parties, having specified degree of association with another person, or

(ii) Connected Persons. 

The TP Rules apply irrespective of whether such associated person is a resident or not in the UAE. In case of a conflict between domestic TP provisions and an international agreement in force in the UAE, the provisions of the international agreement will prevail.

Related Party

The criteria for determining an association between Related Parties is defined below:

-     Kinship or affiliation in case of natural persons: This criteria is triggered when two or more individuals are related to each other up to fourth degree of kinship (common blood ties as determined by ancestors) or affiliation (relationships by marriage).

-     Ownership: This criteria triggers when an individual/juridical person (alone or with related parties), directly or indirectly, owns at least 50% ownership interest in the juridical person. It also covers any person (alone or with related parties) who, directly or indirectly, owns 50% or greater ownership interest in two or more juridical persons.

-     Control: This criteria is triggered if one person has control through direction or influence over the other person, for instance:

o   Exercise of 50% or more of the voting rights of another person;

o   Composition of 50% or more of the board of directors of another person;

o   Receipt of 50% or more of the profits of another person;

o   Determine or exercise significant influence over the conduct of the business and affairs of another person.

Existence of “control” is often a factual exercise. For instance, if one person has influence over the core business activities of the other person with respect to development of its business strategy or determination of product pricing, then it can be considered that there is existence of control.

-     Additional criteria : Following types of ties are also considered as related party:

o   Person and its permanent establishment;

o   Partners in the same Unincorporated Partnership; and

o   Trust or foundation and its trustee, founder, settlor or beneficiary (including trust’s or foundation’s related parties).

Connected Persons

A person, fulfilling below criteria is considered as connected person of a taxable person:

o  An individual (or his related party) has direct or indirect ownership interest in the taxable person or controls taxable person;

o  Director or officer (or their related party) of the taxable person; and

o  Partners (and their related party) in an Unincorporated Partnership.

All payments or benefits to a connected person are tax deductible if they are at ALP and are incurred wholly and exclusively for the purposes of business. This provision does not apply to a taxable person whose shares are traded on a recognised stock exchange or taxable person subject to regulatory oversight.

Controlled Transactions

A transaction or arrangement between related parties or connected persons is referred to as “controlled transactions”. These generally include supply goods and services, financial transactions, rights in intangibles etc. Controlled transactions, whether international or domestic[2], must be at ALP.

Conclusion

Identification of transactions or arrangement with related parties and/or connected persons is a crucial step to comply with the mandate of arm’s length principle. It is important for the UAE businesses, as well as MNEs[3] doing business with UAE entities, to closely monitor and analyze such transactions for compliance with transfer pricing provisions.

Disclaimer : The content on this website is provided for general informational purposes only. It is not intended as professional advice and should not be construed as such. The information is based on the knowledge and experience available at the time of writing and is subject to change.