Related vs Connected party for Corporate Tax in the UAE

In the context of Transfer Pricing regulations under the UAE Corporate Tax Law, “related parties” and “connected persons” are specifically defined to identify situations where special relationships may influence the pricing of transactions. These definitions are critical for ensuring compliance with the arm’s length principle.

1. Related Parties

A Related Party refers to any person or entity that has a relationship with a business that may impact the terms and pricing of transactions between them.

According to UAE Corporate Tax Law, parties are related if:

  • One person has direct or indirect ownership of 50% or more in the other (in terms of voting rights, capital, or profits).
  • Both are under common control (50% or more held by a third party).
  • One person is in a position to exercise significant influence over the other’s business decisions.
  • They are family members up to the fourth degree of kinship (e.g., parents, siblings, uncles, cousins).
  • One person is a director or officer in the other’s business.

Example: A UAE company and its subsidiary, or two companies owned by the same shareholder, are related parties.

2. Connected Persons

A Connected Person typically refers to individuals or entities that have a personal or ownership connection with the taxable person—often relevant in closely held businesses, especially in Free Zones and family-owned companies.

A person is connected if they are:

  • An owner of the taxable business (e.g., sole proprietor or shareholder in a limited liability company).
  • A director or officer of the business.
  • A related party of the owner or of the business (e.g., family members).
  • A person with influence over business decisions due to ownership or family ties.

Connected Persons are especially important in determining whether expenses or payments (e.g., management fees, dividends) are deductible under Corporate Tax, and must meet arm’s length conditions.

3. Summary Table

Term

Key Criteria

Examples

Related Party

Ownership ≥ 50%, control, or close family relation

Parent and subsidiary companies, siblings, etc.

Connected Person

Owners, directors, officers, or their related parties

Company owner’s spouse, board member, family firm

These definitions help the Federal Tax Authority (FTA) ensure that taxable income is not manipulated through favorable or non-arm’s length pricing between parties with close relationships.