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Understanding the Definition of Related Parties for Government Entities in UAE Corporate Tax Law

Understanding the Definition of Related Parties for Government Entities in UAE Corporate Tax Law

by | Jul 26, 2024 | Corporate Tax

Overview

In the UAE, corporate tax is regulated by Federal Decree-Law No. 47 of 2022, also known as the Corporate Tax Law. This law outlines how taxable income should be calculated, including transactions between related parties, which must meet the arm’s length standard as per Article 34.

Definition of Related Parties

According to Article 35 of the Corporate Tax Law, “Related Parties” are defined as entities that can be considered related due to common ownership or control. This ownership or control can be direct or indirect. However, the law clarifies that common ownership or control by a federal or local government does not automatically make entities related parties for tax purposes.

Key Points

  1. Common Ownership and Control:
    • Common ownership and/or control by the UAE Federal Government or a Local Government does not, by itself, make entities related parties under Article 35.
  2. Taxable Persons:
    • Taxable persons with at least 50% common ownership or control through the government are not considered related parties for the purposes of Article 35.
  3. Example Scenario:
    • Entities within a group owned by the government are related to each other but not to entities in another group also owned by the government.
    • For instance, a sale between Entity A in Group 1 and Entity D in Group 2 is not a related party transaction. However, a sale between Entity A and Entity B within Group 1 is considered a related party transaction.

Clarifications and Implications

This clarification, issued by the Federal Tax Authority (FTA), aims to explain how the definition of related parties applies to entities with common government ownership or control. It is essential for businesses to understand that while entities under common government ownership might be related within their group, they are not automatically related to entities in other government-owned groups.

Conclusion

The FTA’s public clarification helps businesses navigate the complexities of related party transactions under the Corporate Tax Law. By understanding these definitions and applications, businesses can ensure compliance and proper tax reporting for their transactions. This clarification reflects the FTA’s current stance and is effective from the date the relevant legislation is implemented.