Summary: The UAE Corporate Tax Law, specifically Article 35, defines a “Related Party” as two or more persons with a specified relationship, which includes kinship up to the fourth degree, a natural person owning or controlling a juridical person with a 50% or greater interest, or two or more juridical persons with 50% or greater common ownership or control. Control is defined as the ability to influence a person through voting rights, board composition, profit sharing, or other means. A public clarification by the Federal Tax Authority (FTA) specifies that if the UAE’s federal or emirate-level governments hold ownership or control, the entities are not considered related parties, which exempts their transactions from transfer pricing rules. This clarification reduces the compliance burden for government-owned entities. To determine taxable income, Article 34 mandates that transactions between related parties must adhere to the arm’s length principle, meaning the results of the transaction must be consistent with what would have been realized between independent, unrelated parties under similar circumstances. The law specifies five accepted transfer pricing methods to determine this, including the Comparable Uncontrolled Price (CUP) method. If a transaction falls outside the acceptable arm’s length range, the Authority can make adjustments to the taxable income of the parties involved.
I. First we have to understand where the related party is defined in Article 35 of Corporate Tax Law
Article 35 – Related Parties and Control
1) For the purposes of this Decree-Law, “Related Parties” means any of the following:
a) Two or more natural persons who are related within the fourth degree of kinship or affiliation, including by way of adoption or guardianship.
b) A natural person and a juridical person where:
1. the natural person or one or more Related Parties of the natural person are shareholders in the juridical person, and the natural person, alone or together with its Related Parties, directly or indirectly owns a 50% (fifty percent) or greater ownership interest in the juridical person; or
2. the natural person, alone or together with its Related Parties, directly or indirectly Controls the juridical person.
c) Two or more juridical persons where:
1.one juridical person, alone or together with its Related Parties, directly or indirectly owns a 50% (fifty percent) or greater ownership interest in the other juridical person;
2. one juridical person, alone or together with its Related Parties, directly or indirectly Controls the other juridical person; or
3. any Person, alone or together with its Related Parties, directly or indirectly owns a 50% (fifty percent) or greater ownership interest in or Controls such two or more juridical persons;
d) A Person and its Permanent Establishment or Foreign Permanent Establishment.
e) Two or more Persons that are partners in the same Unincorporated Partnership.
f) A Person who is the trustee, founder, settlor or beneficiary of a trust or foundation, and its Related Parties.
2. For the purposes of this Decree-Law, “Control” means the ability of a Person, whether in their own right or by agreement or otherwise to influence another Person, including:
a) The ability to exercise 50% (fifty percent) or more of the voting rights of another Person.
b) The ability to determine the composition of 50% (fifty percent) or more of the Board of directors of another Person.
c) The ability to receive 50% (fifty percent) or more of the profits of another Person.
d) The ability to determine, or exercise significant”
The phrase directly or indirectly owns a 50% or greater ownership interest means ownership can be held either in a direct straightforward manner or through intermediate entities or related parties. This implies that ownership through chains of companies, family members, trusts, or other related persons counts toward the 50% threshold. Directly or Indirectly, Controls refers to the ability to exercise control not only through direct means but also through indirect mechanisms like agreements, related parties, intermediary persons, or entities.
Control is defined as the ability to influence another person, directly or indirectly, by any means such as:
- Exercising 50% or more of the voting rights.
- Determining 50% or more of the board composition.
- Receiving 50% or more of the profits.
- Exercising significant influence or decision-making power.
The Public Clarification CTP002 issued by the UAE Federal Tax Authority (FTA) on 21 July 2024[1] provides important additional clarifications on the definition and treatment of related parties under the UAE Corporate Tax Law, specifically regarding government ownership or control:
Key Clarifications
- Transactions and arrangements between related parties must comply with the arm’s length standard when determining taxable income, as per the Corporate Tax Law.
- Two or more juridical persons are considered related if there is direct or indirect common ownership or control of 50% or more.
- If the UAE Federal Government or Emirate-level (local) governments hold direct or indirect ownership or control of the involved parties, these parties are not considered related parties under Article 35 of the Corporate Tax Law.
Consequently, transactions between such parties are exempt from transfer pricing rules and related transfer pricing documentation requirements.
Illustrative Example from Clarification
Two groups of companies, Group 1 and Group 2, each fully owned by a local Emirate-level government:[2]
Group 1: Entity 1 owns 100% of Entities A and B.
Group 2: Entity 2 owns 100% of Entities C and D.
Because both groups are owned by the same government entity, Group 1 and Group 2 are not related parties.
Transactions between Group 1 and Group 2 (e.g., Entity A sells to Entity D) are not related party transactions and thus not subject to transfer pricing. However, transactions within each group (e.g., Entity 1 to A, or Entity 2 to D) are related party transactions subject to the arm’s length principle and transfer pricing rules.
The exclusion of government ownership/control from related party status means government-controlled entities can be treated as independent groups for transfer pricing purposes. The definition of related parties still encompasses direct or indirect ownership or control of 50% or more, except where such ownership/control is solely through the UAE federal or emirate governments.
This position reduces compliance burdens where government entities own multiple companies via shared ownership/control. These clarifications by the FTA ensure more precise application of transfer pricing rules and related party definitions in government-owned corporate structures under UAE Corporate Tax Law.
2. How Arm’s Length is Calculated in Related Party Transactions
Under Article 34 of Federal Decree-Law No. 47 of 2022 explained the calculation of Arm’s Length in related part transactions.
Article 34 – Arm’s Length Principle
1.In determining Taxable Income, transactions and arrangements between Related Parties must meet the arm’s length standard as specified in Clauses 2, 3, 4 and 5 of this Article and any conditions that may be prescribed in a decision issued by the Authority.
2. A transaction or arrangement between Related Parties meets the arm’s length standard if the results of the transaction or arrangement are consistent with the results that would have been realised if Persons who were not Related Parties had engaged in a similar transaction or arrangement under similar circumstances.
3. The arm’s length result of a transaction or arrangement between Related Parties must be determined by applying one or a combination of the following transfer pricing methods:
a) The comparable uncontrolled price method.
b) The resale price method.
c) The cost-plus method.
d) The transactional net margin method.
e) The transactional profit split method.
4. The Taxable Person may apply any transfer pricing method other than the methods listed 36 Federal Decree-Law No. 47 of 2022 – Unofficial translation in Clause 3 of this Article where the Taxable Person can demonstrate that none of the above methods can be reasonably applied to determine an arm’s length result and that any such other transfer pricing method used satisfies the condition of Clause 2 of this Article.
5. The choice and application of a transfer pricing method or combination of transfer pricing methods under Clause 3 or 4 of this Article must be made having regard to the most reliable transfer pricing method and taking into account following factors:
a. The contractual terms of the transaction or arrangement.
b. The characteristics of the transaction or arrangement.
c. The economic circumstances in which the transaction or arrangement is conducted.
d. The functions performed, assets employed, and risks assumed by the Related
e. Parties entering into the transaction or arrangement.
f. The business strategies employed by the Related Parties entering into the
g. transaction or arrangement.
6. The Authority’s examination as to whether income and expenditures resulting from the Taxable Person’s relevant transactions or arrangements meet the arm’s length standard shall be based on the transfer pricing method used by the Taxable Person in accordance with Clause 3 or 4 of this Article, provided such transfer pricing method is appropriate having regard to the factors mentioned in Clause 5 of this Article.
7. Application of the selected transfer pricing method or combination of transfer pricing methods in accordance with Clause 3 or 4 of this Article may result in an arm’s length range of financial results or indicators acceptable for establishing the arm’s length result of a transaction or arrangement between Related Parties, subject to any conditions specified in a decision issued by the Authority.
8. Where the result of the transaction or arrangement between Related Parties does not fall within the arm’s length range, the Authority shall adjust the Taxable Income to achieve the arm’s length result that best reflects the facts and circumstances of the transaction or arrangement.
9. Where the Authority makes an adjustment to the Taxable Income pursuant to Clause 8 of this Article, the Authority shall rely on information that can or will be made available to the Taxable Person.
10. Where the Authority or a Taxable Person adjusts the Taxable Income for a transaction or Federal Decree-Law No. 47 of 2022 – Unofficial translation arrangement to meet the arm’s length standard, the Authority shall make a corresponding adjustment to the Taxable Income of the Related Party that is party to the relevant transaction or arrangement.
11. Where a foreign competent authority makes an adjustment to a transaction or arrangement involving a Taxable Person to meet the arm’s length standard, such Taxable Person can make an application to the Authority to make a corresponding adjustment to its Taxable Income.
Arm’s Length Standard (Clause 2): The transaction or arrangement between related parties must produce results consistent with those that would have been realized if the same transaction had been carried out between independent persons under comparable circumstances.
Transfer Pricing Methods (Clause 3): The arm’s length result must be determined using one or a combination of the following methods:
- Comparable Uncontrolled Price (CUP) method
- Resale Price method
- Cost-Plus method
- Transactional Net Margin method (TNMM)
- Transactional Profit Split method
Alternative Methods (Clause 4): Taxpayers may use other transfer pricing methods not listed above if they can demonstrate those methods reasonably determine an arm’s length result consistent with Clause 2.
Method Selection Factors (Clause 5): The choice and application of transfer pricing methods must consider:
- Contractual terms of the transaction
- Characteristics of the transaction
- Economic circumstances of the transaction
- Functions performed, assets employed, risks assumed by related parties
- Business strategies of the related parties involved
Authority Examination (Clause 6): The Federal Tax Authority reviews whether the method applied is appropriate based on the above factors to ensure the transaction meets the arm’s length standard.
Arm’s Length Range (Clause 7): The applied method may yield an acceptable “arm’s length range” of financial results or indicators. Results falling within this range are accepted.
Adjustments (Clauses 8-10): If transactions fall outside the arm’s length range, the Authority can adjust taxable income to the arm’s length result reflecting the facts and circumstances. Corresponding adjustments are made to related parties’ taxable income.
Corresponding Adjustments (Clause 10): When an adjustment is made by either the Authority or the taxpayer to align taxable income with arm’s length, the other related party’s taxable income is adjusted accordingly.
Foreign Competent Authority Adjustments (Clause 11): If a foreign tax authority makes an arm’s length adjustment involving the taxpayer, the taxpayer can apply for a corresponding adjustment under UAE law.
Notes:
[1] https://www.taxmann.com/post/blog/world-tax-news-uae-tax-authority-provides-clarification-on-the-definition-of-related-party-and-more
[2] https://tax.gov.ae/Datafolder/Files/Pdf/2024/CTP002%20-%20Definition%20of%20related%20parties%20for%20GEs%20-%2021%2007%202024.pdf
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