In the context of the UAE Corporate Tax, a related party is defined based on the relationship between entities or individuals that have the potential to influence each other’s business decisions and operations. This definition aligns with international tax standards, particularly those outlined by the OECD (Organisation for Economic Cooperation and Development).
Key Points to Consider for Related Parties
1. Ownership and Control: A related party includes individuals or entities that own or control, directly or indirectly, 50% or more of another entity. This control can be in the form of voting rights, capital, or profits.
Example: Company A owns 60% of Company B. Since Company A has more than 50% ownership, it can control Company B’s decisions and operations. Thus, Companies A and B are related parties.
2. Significant Influence: If an individual or entity can exert a significant influence over another entity’s financial and operating policies, they are considered related parties. A significant influence typically involves owning 20% to 50% of voting power in an entity.
Example: Individual X owns 30% of Company Y. Although X does not have majority control, owning 30% of voting rights has a significant influence on Company Y’s financial and operational policies. Therefore, Individual X and Company Y are related parties
3. Common Management: Entities managed or controlled by the same individual or group of individuals are also regarded as related parties.
Example: Companies C and D have the same CEO and board. Common management implies that the same individual controls both the companies. Hence, companies C and D are the related parties.
4. Joint Ventures and partnerships: Entities involved in joint ventures or partnerships where the partners or participants have significant control or influence over the venture’s operations are related parties.
Example: Companies G and H form a joint venture, Company I, where each owns 50%. Both Company G and Company H have significant control over Company I’s operations. Therefore, companies G, H, and I are related parties.
5. Connected Persons: Any person connected to the entity, such as directors or shareholders with substantial interest, can also be considered a related party.
Example: Ms. A is a director and owns 25% of Company J. Mr. B, a significant shareholder with a 35% stake in Company J, was Ms. A’s brother. Ms. A and Mr. B are connected persons; thus, they are parties related to Company J.
6. Family Relationships: In the context of the UAE Corporate Tax, party relationships extend to various degrees of family relationships. This ensures that transactions within the family network are scrutinized to prevent tax evasion. Below is a detailed explanation of the degrees of relationship considered for the related parties:
Degrees of Family Relationships
a) First Degree Relatives
These are the closest family members:
- Spouses: Husband or wife.
- Parents: Both biological and adoptive parents.
- Children: Both biological and adoptive children(s).
Example: Mr. A owns 30% of Company X.’s wife, Mrs. A owns 20% of Company Y. Mr. A and Mr. A are first-degree relatives, making Companies X and Y related parties.
b) Second Degree Relatives
These include:
- Siblings: Brothers and sisters, including half-siblings.
- Grandparents: Both maternal and paternal grandparents.
- Grandchildren: Both biological and adoptive grandchildren.
Example: Ms. B owns 25% of Company Z. Her brother, Mr. C, owned 25% of Company W. Ms. B and Mr. C are second-degree relatives, making companies Z- and W-related parties.
c) Third Degree Relatives
These extend further to:
- Aunts and Uncles: Both maternal and paternal aunts and uncles.
- Nieces and Nephews: Children of one’s siblings.
- Great-grandparents and Great-grandchildren: The grandparents of one’s parents and the grandchildren of one’s children.
Example: Mr. D owns 15% of Company M. His niece, Ms. E (the daughter of Mr. D’s brother), owns 20% of Company N. Mr. D and Ms. E are third-degree relatives, making companies M- and N-related parties.
d) Fourth Degree Relatives
This category includes:
- First Cousins: Children of one’s aunts and uncles.
Example: Ms. F owns 20% of Company P. Her first cousin, Mr. G (son of Ms. F’s aunt), owned 25% of Company Q. Ms. F and Mr. G are fourth-degree relatives, making companies P- and Q-related parties.
Practical Implications
Example: Family Holdings
Scenario: A family owns multiple businesses. The father owns 40% of Company A mother owns 30% of Company B, and the children collectively own 50% of Company C. Transactions between these companies must be carefully monitored and documented to ensure compliance with UAE Corporate Tax regulations, treating them as related parties.
Related Prties – Detailed Practical Examples
Example 1: Direct Ownership
Scenario: Single Entity Ownership
Company A: Owned 60% by Mr. X.
Explanation:
Mr. X directly owns more than 50% of Company A, giving him control over the company’s decisions and operations.
Therefore, Mr. X and Company A are related parties.
Example 2: Indirect Ownership
Scenario: Multi-Level Ownership
Parent Company B: Owns 80% of Subsidiary Company C.
Subsidiary Company C: Owns 70% of Sub-subsidiary Company D.
Explanation:
Parent Company B indirectly owns 56% (80% of 70%) of Sub-subsidiary Company D.
The control exerted through multiple levels makes Parent Company B and Sub subsidiary Company D related parties.
Example 3: Common Ownership
Scenario: Shared Ownership by Multiple Entities
Company E: Owned 40% by Mr. Y and 30% by Mrs. Y (Mr. Y’s spouse).
Company F: Owned 45% by Mr. Y and 20% by Mrs. Y.
Explanation:
Mr. Y and Mrs. Y collectively own significant portions of both Company E and Company F.
Their combined ownership and spousal relationship make Company E and Company F related parties.
Example 4: Ownership through Family Relationships
Scenario: Family-Owned Entities
Company G: Owned 35% by Mr. Z and 25% by his son, Mr. W.
Company H: Owned 30% by Mr. Z’s wife, Mrs. Z, and 20% by Mr. W.
Explanation:
The family members collectively own significant portions of both Company G and Company H.
The father-son and spousal relationships make Company G and Company H related parties.
Example 5: Corporate Group Structure
Scenario: Corporate Group with Multiple Subsidiaries
Parent Company I: Owns 100% of Subsidiary Company J and 100% of Subsidiary Company K.
Subsidiary Company J: Owns 60% of Company L.
Subsidiary Company K: Owns 40% of Company M.
Explanation:
Parent Company I indirectly controls Company L through Subsidiary Company J and Company M through Subsidiary Company K.
Therefore, Parent Company I, Subsidiary Company J, Subsidiary Company K, Company L, and Company M are all related parties.
Example 6: Joint Ventures
Scenario: Joint Venture with Significant Ownership
Company N: Owned 50% by Company O and 50% by Company P.
Company O: Owned 60% by Mr. A.
Company P: Owned 70% by Mr. B.
Explanation:
Companies O and P both have significant influence over Company N.
Mr. A and Mr. B’s control over Companies O and P, respectively, makes Company N related to both Company O and Company P, as well as to Mr. A and Mr. B.
Example 7: Influence without Majority Ownership
Scenario: Significant Influence through Minority Ownership
Company Q: Owned 30% by Ms. C and 25% by Mr. D.
Company R: Owned 20% by Ms. C and 30% by Mr. D.
Explanation:
Ms. C and Mr. D collectively own significant shares in both Company Q and Company R, allowing them to influence both companies’ decisions.
Their combined significant ownership makes Company Q and Company R related parties.
Identifying related parties under the UAE Corporate Tax framework is essential for compliance and transparency. This includes understanding direct and indirect ownership, significant influence, common management, joint ventures, connected persons, and family relationships. By recognizing these connections and documenting transactions accordingly, businesses can avoid non-compliance risks and ensure accurate financial reporting. Proper monitoring and adherence to these guidelines help maintain fair taxation and regulatory standards.
| To dive deeper into the critical steps for documenting related party relationships and ensure your compliance with UAE Corporate Tax regulations, click here to continue reading the full guide in our PDF by one of our experts. It includes detailed steps, guidelines, and practical examples.⇩ Related Party in Corporate Tax Law ⇩ |  Sameer KhanAudit and Tax Manager |
