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Fri, Nov 15, 2024 | Jumada al-Awwal 13, 1446 | DXB
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How can you identify related parties for corporate tax purposes
The management of the companies will be required to understand the relationship between the parties that participate in the transaction and apply the above-given principles accordingly to ascertain their related party status. — File photo
Transfer price refers to the prices of goods and services charged on transactions between the related parties and with the connected persons.
- By
- Mahar Afzal/Compliance Corner
As defined in the public consultation document (the document) issued by the Ministry of Finance of the UAE, “the related party is an individual or entity that has a pre-existing relationship with a business that is within the scope of the UAE corporate tax (CT) regime through ownership, control, or kinship (in the case of natural persons”.
In the document, seven criteria have been defined to identify the related parties, and we have discussed these all one by one in this article.
In the first criteria, the document states that “two or more individuals related to the fourth degree of kinship or affiliation, including by birth, marriage, adoption or guardianship”, will be considered related parties for corporate tax purposes. The first criteria cover natural persons only, which is not applicable to businesses and legal entities.
The words used, “fourth degree of kinship or affiliation”, are critical to understand this relationship. The first degree of kinship or affiliation is between husband and wife; and parents and child. Like spouses are related parties. Father/mother and daughter/son are related parties. The second degree of kinship or affiliation is between siblings. Like siblings are related parties. The third degree of kinship or affiliation is between the uncle/aunt with a niece/nephew, while the fourth degree is between first cousins.
The above degree of relationship can be established based on birth, marriage, adoption, or guardianship. Like a father of a girl adopts a boy, then the children will be considered related parties based on the second degree of kinship. The kinship can be established based on guardianship as well. A guardianship order is a court appointment which authorises someone to take actions or make decisions on behalf of an individual who lacks capacity, like a mother of a girl who has been nominated as a guardian by the court of any other girl. Both girls will be considered related parties under the second degree of kinship.
In the second criteria, that document defines that an individual and a legal entity will be assumed related parties where an individual alone or together with another related party directly or indirectly owns at least 50 per cent of shares of the company or controls the legal entity. For example, if Mr X holds 51 per cent share of Company B, then Mr X and Company B will be treated as related parties. If the full powers have been given to Ms GG through the board resolution or through the memorandum of Rix Ltd, where Ms. GG has full control of Rix Ltd and can take all decisions, then Ms GG and Rix Ltd will be treated as related parties.
The third criteria states that two or more legal entities where one legal entity alone, or together with a related party, directly or indirectly owns at least 50 per cent shares or controls the other legal entity will be considered related parties. Like Alpha Ltd holds 60 per cent shares in Beta Ltd. Since Alpha Ltd holds more than 50 per cent shares in Beta Ltd so Alpha Ltd and Beta Ltd will be assumed related parties.
The fourth criteria requires that two or more legal entities where a taxpayer alone, or with a related party, directly or indirectly owns at least 50 per cent of shares or controls them; will be treated as related parties. Like Mr JJ has a 20 per cent investment in P Ltd, and his nephew has a 60 per cent investment in Q Ltd and 40 per cent investment in P Ltd. In this situation, P Ltd and Q Ltd will be considered related parties as both are more than 50 per cent owned by Mr JJ and his cousin who are in the fourth degree of kinship.
The document further defines in the fifth criteria that a taxpayer and its branch or permanent establishment will be treated as related parties. Like parent company and subsidiaries will be considered as related parties. The parent company and branches will be assumed as related parties.
The partners in the same unincorporated partnership (unregistered partnership) will be considered related parties as required by the sixth principle of clause 7.4 of the document that deals with the related parties.
Moreover, if a person is conducting multiple business activities, out of these, some are exempt, and some are non-exempt business activities, then the last criteria to judge the related parties requires that the exempt and non-exempt business activities of the same person will fall under the definition of related parties.
The management of the companies will be required to understand the relationship between the parties that participate in the transaction and apply the above-given principles accordingly to ascertain their related party status. If it has been established that the transaction is between related parties, then arm’s length principles should be applied as required by clause 7.3 of the document.
Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above is not an official but a personal opinion of the writer based on the public consultation document on corporate tax. For any queries/clarifications, please write to him at compliance@kresscooper.com
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