Understanding Related Parties in UAE Transfer Pricing
The UAE government introduced corporate tax in 2023. This change made every business think about tax compliance and planning. At the heart of corporate tax sits transfer pricing. Transfer pricing means that companies set prices for transactions with related parties, making sure those prices are fair and open.
Before businesses can apply transfer pricing, they must first find out who counts as a related party. This task can look simple at first, but it often turns tricky. Related parties can include family members, business partners, and business entities owned by those people. Companies must check every connection to see if someone counts as a related party for transfer pricing.
What Does Transfer Pricing Mean?
Transfer pricing is a group of rules set by the government. These rules make companies use fair prices in deals with related parties. Fair prices mean the same prices independent companies would use in a normal open market.
When companies use fair prices, they stop profits from moving unfairly between companies or countries. Transfer pricing helps the government collect the right tax. Globalisation has made transfer pricing more important than ever. Many companies now do business across borders, so these rules help create fair trade and stop fake profits.
How Do You Select Related Parties for Transfer Pricing?
In the UAE, the Federal Tax Authority (FTA) made guidelines to show who counts as a related party. The definition is wide. It covers more than just direct family or owners. A business must look at several things to select related parties:
1. Family Ties
- Related parties can include people up to the fourth degree.
- First degree: parents, children, and spouse’s parents or children.
- Second degree: siblings, grandchildren, spouse’s siblings or grandparents.
- Third degree: aunts, uncles, great-grandchildren, nieces, nephews.
- Fourth degree: great-great-grandparents, cousins, grandnephews, and more.
2. Ownership and Shares
- Any person and a business might be related if a person (or their family or related persons) owns at least 50% of the business.
- This also covers people who control at least 50% of profits or voting rights.
3. Control Mechanisms
- Sometimes, control is not just about shares.
- If a person can hire or fire top managers, make important choices, or control money, they count as related.
- Anyone who receives 50% or more of the profits from a business is also a related party.
Extra Rules for Choosing Related Parties
Besides the main rules above, the FTA adds some extra points:
- A person and their permanent establishment (PE), including foreign PEs, are related parties for transfer pricing.
- Partners in the same unincorporated partnership are related.
- Any person who is a trustee, founder, settlor, or beneficiary of a trust or foundation, or their related parties, can be related.
Businesses must look at every relationship, including partnerships and trusts. Checking these links keeps businesses safe from mistakes with transfer pricing.
Why Is Choosing Related Parties Important?
Identifying related parties matters for three big reasons:
- Compliance: Companies must follow all tax rules. If they don’t spot all related parties, they can get into trouble with the FTA.
- Tax Optimisation: Knowing who’s related helps companies plan taxes and follow the arm’s length rule.
- Documentation: Every transaction with a related party must have clear records. This makes audit and review easier.
Missing a related party or not having paperwork can cause big problems during an FTA check. Careful work saves money and time.
How to Handle Transfer Pricing and Related Parties
Companies in the UAE should:
- Make a list of all related parties each year.
- Use clear rules from the FTA for each relationship.
- Keep all contracts, emails, and documents about deals with related parties.
- Check the ownership and control structures regularly.
Use these tips for better transfer pricing:
- Get expert help from Mubarak Al Ketbi (MAK) Auditing.
- Train your team about new tax laws.
- Stay up to date with changes in the law from the FTA.
Key Points in Transfer Pricing for UAE Businesses
- The government checks all business deals for fair pricing.
- Businesses must document every deal with related parties.
- All ownership, family, and control ties must be checked for each year.
- Companies need to keep detailed records for five years or more.
How Mubarak Al Ketbi (MAK) Auditing Can Help You
Mubarak Al Ketbi (MAK) Auditing always stands by UAE businesses. Our team understands transfer pricing and the complex web of related parties. We give businesses the right advice about tax and audit, help with FTA compliance, and prepare all needed documents.
We can help you keep your business in line with the rules. With our support, you won’t have to worry about missing details or breaking the law. Remember, when it comes to tax, it’s better to be safe than sorry!
For more information:
- Visit our office: Saraya Avenue Building – Office M-06, Block/A, Al Garhoud – Dubai – United Arab Emirates
- Contact/WhatsApp: +971 50 276 2132
