Dubai’s introduction of Corporate Tax marks a fundamental shift in how businesses operating in the Emirate manage tax compliance and inter-company dealings. One of the most critical and closely scrutinised areas under the UAE Corporate Tax framework is Related Party Transactions under Dubai, commonly referred to as RPTs. These transactions, if not structured and documented correctly, can expose businesses to tax adjustments, penalties, and increased compliance risks.
This article provides a comprehensive guide to Related Party Transactions under Dubai Corporate Tax, covering key definitions, legal provisions, the arm’s length principle, transfer pricing rules, disclosure requirements, penalties, and practical examples relevant to Dubai-based businesses.
Introduction to Dubai Corporate Tax and Related Party Transactions
The UAE Corporate Tax regime, effective from 1 June 2023, applies uniformly across all Emirates, including Dubai. While commonly referred to as “Dubai Corporate Tax” in business practice, the law is federally governed under the UAE Corporate Tax Law (Federal Decree-Law No. 47 of 2022).
Related Party Transactions are a key focus area because they present a higher risk of profit shifting, tax base erosion, and non-arm’s-length pricing. As a result, Dubai businesses engaging in transactions with related entities or connected persons must ensure strict compliance with transfer pricing principles.
What Are Related Party Transactions?
A Related Party Transaction refers to any financial or commercial transaction conducted between a taxable person and another party that is considered “related” under the UAE Corporate Tax Law.
These transactions may include:
- Sale or purchase of goods
- Provision of services
- Financing arrangements
- Use or transfer of intellectual property
- Cost-sharing or management fees
Under Dubai Corporate Tax, such transactions must be conducted at arm’s length, meaning the terms and pricing should be comparable to those agreed between independent parties under similar circumstances.
Definition of Related Parties Under Dubai Corporate Tax
Related Parties
Under the UAE Corporate Tax Law, Related Parties include those with which there is control, ownership, or significant influence. Common examples include:
- Parent companies and subsidiaries
- Companies under common control
- Entities with direct or indirect ownership interests
- Permanent establishments and their head offices
- Partners in the same partnership
Ownership thresholds and control tests are applied to determine whether parties are considered related.
Connected Persons
In addition to Related Parties, the law also defines Connected Persons, which include:
- Company directors
- Company officers
- Shareholders with ownership or influence
- Relatives up to the fourth degree of kinship
Transactions with Connected Persons are also subject to arm’s length requirements.
Types of Related Party Transactions Covered
Dubai Corporate Tax covers a wide range of related party transactions, including but not limited to:
1. Sale and Purchase of Goods
Inter-company trading of raw materials, finished goods, or inventory must be priced at market value.
2. Services and Management Fees
Management services, technical support, IT services, HR services, and shared service arrangements are closely examined by tax authorities.
3. Financing Transactions
Loans, advances, guarantees, and interest arrangements between related parties must reflect market interest rates and terms.
4. Intellectual Property Transactions
Royalty payments, licensing fees, and transfer of IP rights must be benchmarked against comparable market transactions.
5. Cost Allocation and Cost Sharing
Allocation of group expenses must follow a reasonable and documented allocation key.
The Arm’s Length Principle Explained
The Arm’s Length Principle (ALP) is the cornerstone of related party compliance under Dubai Corporate Tax.
What Does Arm’s Length Mean?
A transaction is considered arm’s length if:
- The pricing
- The terms
- The conditions
are consistent with what independent parties would have agreed in comparable circumstances.
If the Federal Tax Authority (FTA) determines that a transaction is not at arm’s length, it has the power to adjust taxable income accordingly.
Transfer Pricing Rules Under Dubai Corporate Tax
Related Party Transactions in Dubai are governed by transfer pricing regulations, aligned with OECD Transfer Pricing Guidelines.
Accepted Transfer Pricing Methods
Businesses may use one of the following methods, depending on the nature of the transaction:
- Comparable Uncontrolled Price (CUP) Method
- Resale Price Method
- Cost Plus Method
- Transactional Net Margin Method (TNMM)
- Transactional Profit Split Method
The selected method must be:
- Appropriate to the transaction
- Consistently applied
- Supported by documentation
Documentation Requirements for Related Party Transactions
Dubai Corporate Tax mandates robust documentation to substantiate arm’s length pricing.
Key Documentation Includes:
- Transfer pricing policy
- Functional, asset, and risk (FAR) analysis
- Benchmarking studies
- Inter-company agreements
- Economic analysis
While documentation submission may not be mandatory for all businesses, it must be available upon request by the FTA.
Thresholds and Applicability
Not all businesses are subject to the same level of documentation requirements.
- Large multinational groups are subject to extensive transfer pricing compliance.
- SMEs may benefit from simplified documentation, subject to thresholds prescribed by the Ministry of Finance.
- Free Zone entities are not exempt from arm’s length rules, even if they benefit from a 0% tax rate on qualifying income.
Failure to maintain documentation can result in adverse tax adjustments.
Disclosure of Related Party Transactions in Corporate Tax Return
Dubai businesses must disclose related party transactions in their Corporate Tax Return.
Disclosure typically includes:
- Nature of transaction
- Identity of related party
- Transaction value
- Confirmation of arm’s length compliance
Incorrect or incomplete disclosure increases audit risk.
Penalties for Non-Compliance
Non-compliance with related party and transfer pricing rules can result in:
- Adjustment of taxable income
- Administrative penalties
- Interest on unpaid tax
- Increased scrutiny in future tax periods
Penalties may also apply for failure to maintain or submit documentation when requested.
Practical Examples of Related Party Transactions in Dubai
Example 1: Management Fees
A Dubai-based subsidiary pays management fees to its foreign parent. Without benchmarking, the FTA may disallow excessive fees.
Example 2: Intercompany Loan
A shareholder provides an interest-free loan to a Dubai company. The FTA may impute market interest income.
Example 3: Free Zone Entity
A Free Zone company transacts with its mainland parent. Arm’s length pricing still applies despite tax incentives.
Impact on SMEs and Free Zone Entities
SMEs
Small and medium enterprises often underestimate related party compliance. Even informal arrangements with shareholders can trigger arm’s length requirements.
Free Zone Companies
Free Zone tax benefits do not override transfer pricing obligations. Non-compliant RPTs can jeopardise qualifying income status.
Best Practices for Managing Related Party Transactions
To mitigate risk, Dubai businesses should:
- Identify all related parties and connected persons
- Formalise inter-company agreements
- Implement transfer pricing policies
- Conduct periodic benchmarking studies
- Maintain contemporaneous documentation
Proactive compliance reduces audit exposure and financial risk.
How Ease to Compliance Can Help
At Ease to Compliance, we assist Dubai businesses with:
- Identification of related parties and connected persons
- Transfer pricing policy development
- Benchmarking and economic analysis
- Documentation preparation
- Corporate Tax Return Disclosure
- Audit and FTA representation
Our team ensures your related party transactions remain compliant, defensible, and tax-efficient.
If you require expert assistance with related party compliance under Dubai Corporate Tax, transfer pricing documentation, or Corporate Tax return disclosures, contact our team today for tailored, practical support.
Conclusion
Related Party Transactions under Dubai Corporate Tax require careful planning, proper pricing, and strong documentation. With increased scrutiny by tax authorities, businesses must move beyond informal arrangements and adopt a structured, compliant approach.
By aligning related party dealings with the arm’s length principle and transfer pricing rules, Dubai businesses can safeguard themselves against tax adjustments and penalties while maintaining operational efficiency.
FAQs – Related Party Transactions Under Dubai Corporate Tax
1. Do related party transactions need to be conducted at arm’s length even if they result in a tax loss?
Answer: Yes, the arm’s length principle applies regardless of whether the transaction leads to a profit or a loss. The Federal Tax Authority can still adjust non-arm’s-length pricing even if the transaction does not reduce the immediate tax payable.
2. Are historical related party agreements signed before the Corporate Tax effective?
Answer: Yes, Contracts and arrangements entered into before the introduction of Dubai Corporate Tax may still be reviewed. If such agreements continue after the effective date, they must comply with arm’s length requirements.
3. Is transfer pricing benchmarking required every year?
Answer: Not necessarily. While benchmarking studies do not always need annual updates, businesses should review and refresh them periodically or when there is a material change in business, functions, risks, or economic conditions.
4. Can the Federal Tax Authority request related party documentation during a tax audit?
Answer: Yes, the FTA has the authority to request transfer pricing documentation and related party agreements during audits, even if these documents were not submitted with the Corporate Tax return.
5. Are domestic related party transactions within the UAE subject to transfer pricing?
Answer: Yes, Transfer pricing and arm’s length rules apply to both cross-border and domestic related party transactions, including transactions between mainland and Free Zone entities.
