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The UAE's Corporate Tax Law, governed by Federal Decree-Law No. 47 of 2022, mandates that transactions between related parties adhere to the arm’s length standard. This ensures that taxable income is accurately determined and is taxed in the jurisdiction where it is earned.
Recently, the FTA issued a public clarification to elucidate the definition of "Related Parties" under Article 35, specifically when there is common ownership or control by a government entity. This clarification is essential for businesses to understand their obligations and avoid potential tax issues.
Understanding Related Parties
The transfer pricing 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.
Article 35 of the Corporate Tax Law provides a clear definition of “related parties” for the purpose of transfer pricing. According to this definition, two or more juridical persons are considered related parties if there is common ownership or control, whether direct or indirect. This definition is crucial for applying the arm's length principle to transactions between related entities, as stipulated in Article 34 of the law.
Government Ownership and Control
The FTA's public clarification emphasizes that common ownership or control by the UAE Federal Government or a local government (i.e., Emirate-level government) does not automatically classify entities as related parties for tax purposes. Taxable persons with at least 50% common ownership or control through a government entity are not considered related parties solely based on this ownership.
The clarification explains this with the help of examples as follows:
- Entities in Group 1 and Group 2 are not considered related parties despite being owned by a local government. Therefore, transactions between these groups do not need to comply with the arm’s length principle or transfer pricing documentation requirements.
- However, within each group, entities are related. For instance, Entity A and Entity B in Group 1 are considered related parties, and their transactions must adhere to the arm's length standard.
This exclusion aims to address the unique nature of government-related entities and their operations.
Conclusion:
The FTA’s Public Clarification on the definition of related parties, where there is common ownership or control through a government entity, is in the nature of an exemption accorded to government controlled entities from the applicability of transfer pricing provisions. Taxpayers may take the benefit of this clarification in consultation with their advisors.
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