Related Party

What is a Related Party?

Related Parties are persons or entities that have a special relationship through ownership, control, or family ties. Transactions between related parties are subject to special tax rules to ensure they're conducted at arm's length (market) prices and not manipulated for tax advantage.

Types of Related Party Relationships

Ownership Control

• Parent and subsidiary companies
• Sister companies with common parent
• Entities with 50%+ common ownership
• Direct or indirect shareholding control

Family Relationships

• Spouses and partners
• Parents and children
• Siblings
• Other close family members

Management Control

• Director and their company
• Key management personnel
• Partners in a partnership
• Trustees and beneficiaries

Economic Dependence

• Sole supplier/customer relationships
• Exclusive distribution agreements
• Financial dependence
• Joint ventures and partnerships

Why Related Party Transactions Matter

Tax authorities scrutinize related party transactions because they can be used to:

• Shift profits to low-tax jurisdictions
• Inflate expenses to reduce taxable income
• Manipulate VAT by mispricing goods/services
• Avoid Corporate Tax through artificial pricing
• Create unfair competitive advantages

Arm's Length Principle

All transactions between related parties must be conducted at arm's length - the price that would be charged between independent third parties in comparable circumstances.

Related Party Price = Market Price

The price charged between related parties should be the same as what would be charged to unrelated customers

UAE Transfer Pricing Rules

Under UAE Corporate Tax law, related party transactions must comply with transfer pricing regulations:

1 Documentation: Maintain transfer pricing documentation for transactions exceeding AED 200 million
2 Master File & Local File: Prepare detailed documentation of intercompany transactions
3 Comparability Analysis: Demonstrate that pricing is consistent with market rates
4 Adjustments: FTA can adjust taxable income if transactions aren't at arm's length

Common Related Party Transactions

Goods & Services

Sale/purchase of inventory, raw materials, or services between group companies

Intercompany Loans

Lending money between related entities with interest rates

Royalties & IP

License fees for intellectual property, trademarks, patents

Management Fees

Charges for management, administrative, or technical services

VAT Implications

For VAT purposes, related party transactions have specific considerations:

Market Value Rule: VAT is calculated on the market value if no consideration or below-market consideration
Tax Groups: Related parties can form tax groups where intercompany transactions are disregarded
Input Tax: Related party pricing affects input tax recovery calculations

Penalties for Non-Compliance

Tax adjustments increasing taxable income
Penalties up to 50% of understated tax
Interest on unpaid tax amounts
Reputation damage and increased audit scrutiny