In a broader context, Related Parties encompass individuals or legal entities that maintain pre-existing relationships with other individuals or entities. Such relationships can be established through ownership, control, or kinship in the case of natural persons. Thus, Taxable Persons are advised to seek the expert services of Corporate Tax Consultants in UAE to effectively determine taxability and ensure compliance with the corporate tax law.
Scope of Ownership and Control
Concerning ownership and Control, the international standard designates a Related Party ownership threshold of 50% or more, recognizing that a simple majority is typically sufficient to exert influence and governance over another entity. Under the circumstances, two parties, whether they are natural or legal entities, can be classified as related to each other. Additionally, two natural persons are deemed related if their relationship extends up to the fourth degree of kinship or affiliation, encompassing cases of adoption or guardianship. Kinship involves, while affiliation encompasses relationships arising from the marriage or if one natural person's spouse shares kinship with the other.
Degree of Kinship for Corporate Tax Purposes:
The degrees of kinship and affiliation are detailed as follows:
The first degree encompasses a natural person's parents and children, along with the parents and children of their spouse. The second degree additionally covers a natural person's grandparents, grandchildren, and siblings, as well as the grandparents, grandchildren, and siblings of their spouse. The third degree further includes great-grandparents, great-grandchildren, uncles, aunts, nieces, and nephews, along with great-grandparents, great-grandchildren, uncles, aunts, nieces, and nephews of their spouse.
The fourth degree extends to great-great-grandparents, great-great-grandchildren, granduncles, grandaunts, grandnieces, grandnephews, and first cousins, as well as the great-great-grandparents, great-great-grandchildren, granduncles, grandaunts, grandnieces, grandnephews, and first cousins of their spouse. Under Clause 1(b), a natural person and a legal entity are considered related to each other if the natural person, either individually or in collaboration with one or more Related Parties, directly or indirectly.
Identification of Related Parties
The corporate tax statute sets out the criteria for the identification of Related Parties within the framework of legal entities. Specifically, it dictates that legal entities are classified as Related Parties when any individual or a collective group, in conjunction with their Related Parties, possesses a majority ownership stake of 50% or more in these entities or exercises control over them.
In accordance with Clause 1(d) of the corporate tax law, a Person and their UAE or Foreign Permanent Establishment are officially recognized as Related Parties for Corporate Tax purposes. This ensures that the regulations governing transfer pricing, as outlined in Article 34, are applicable to transactions involving a Person and their UAE or Foreign Permanent Establishment, with an obligation to adhere to the arm's length principle.
Within the context of Unincorporated Partnerships, where partners jointly oversee operations and share liability for financial obligations, Clause 1(e) designates partners within the same Unincorporated Partnership as Related Parties for Corporate Tax objectives. This guarantees the enforcement of transfer pricing regulations for transactions between a Person and other Individuals when a close business relationship exists.
These transactions must also conform to the arm's length principle. In scenarios where these partners lack inherent connections due to shared ownership, control, or familial relationships (in the case of natural persons), and their dealings with each other and the Unincorporated Partnership are guided by the mutually agreed-upon economic terms established in the partnership contract, it is generally assumed that these transactions are conducted at arm's length.
More still, Clause 1(f) delineates that a Person holding the role of trustee, founder, settlor, or beneficiary of a trust or foundation shall be considered as Related Party of the trust or foundation and its Related Parties. This ensures that in cases where the trustee, founder, settlor, or beneficiary is a Taxable Person, any transactions involving the trust or foundation and its Related Parties, including other trustees or beneficiaries, must adhere to the arm's length principle.
Clause 2 furnishes the definition of Control within the context of Corporate Tax Law, characterizing it as the capacity of a Person, whether through independent means or via agreements and other methods, to exert influence over another Person. This clause provides a non-exhaustive list of ways in which such influence may be exerted, including:
- Holding a majority stake of 50% or more in the voting rights.
- Possessing the authority to appoint a majority of directors within the other Person.
- Entitlement to a majority share of the other Person's profits.
- Demonstrating the capability to substantially influence the conduct of a Business.
Seek the Expert Services of Trusted Tax Consultants in UAE
To effectively determine taxability in compliance with the corporate tax law, Taxable Persons are advised to seek the expert services of trusted Tax Consultants in UAE. Thus, contact us today and we shall be glad to assist you.
Mostafa is a seasoned Tax Consultant with over 5 years years of experience gained in diverse taxations matters. He has vast expertise in settling tax disputes with the Federal Tax Authority and handling of tax procedures in compliance with tax laws. He is adept in investigating underlying tax intricacies and offering expert tax advisory. He is also well-versed in conducting tax analysis’s and negotiations with the Tax Regulators, upon tax preparation and filing. Mostafa specializes in the areas of Tax law, Auditing, Accounting and Banking law.