An owner, director, officer (including their related parties) of a taxable person is considered connected persons under Article 36 of Federal Decree-Law No. 47 of 2022.
Under UAE Corporate Tax regulations, payments and benefits made to the connected persons must comply with the arm’s length principle to be allowable deductions. Further those payments should be wholly and exclusively incurred for the purposes of Taxable Person’s business. Transactions that are not conducted on commercial terms or involve excessive amounts may be disallowed or adjusted in the taxable income. Therefore, proper documentation, justification and benchmarking are essential to support the deductibility of payments made to connected persons.
This provision complements Article 28 (General Deduction Rules) and reinforces the principle that intra-group or related-party transactions must be conducted at market value, ensuring tax neutrality and integrity in business dealings.
Disclosure in the Corporate Tax Return
The Corporate Tax Return requires disclosure for payment to connected persons if that exceeds AED 500,000 per connected person per tax period.
Proper Documentation, Justification and Benchmarking is more than a compliance requirement, it is a critical safeguard under the UAE Corporate Tax Law to ensure that payments to connected persons are commercially justified, reasonable, and fully deductible. The businesses must maintain robust benchmarking support to avoid tax adjustments, demonstrate arm’s-length compliance, and uphold transparency in their related-party dealings.
Approach for Corporate Tax Return Filing
A robust approach for compliance with Article 36 typically includes:
- Functional Analysis: Understanding the responsibilities, activities, and decision-making authority of the connected person.
- Assessment of Commercial Justification: Evaluating whether the payment is necessary for business operations and adds measurable value.
- Benchmarking & Market Validation: Comparing compensation or benefits with market norms (industry, size, complexity, UAE benchmarks).
- Documentation & Policy Framework: Preparing evidence to support “wholly and exclusively” business purpose and arm’s-length pricing.
- Periodic Review: Updating benchmarks and policies annually
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Way Forward
To mitigate tax risk and ensure defensible compliance:
- Identify all Connected Persons and payments made during the tax period.
- Evaluate the nature and purpose of each payment to confirm commercial justification.
- Perform benchmarking for salaries, allowances, and benefits exceeding disclosure thresholds.
- Prepare supporting documentation to justify ALP compliance and maintain during audits.
- Implement a Connected Persons Policy to standardize approvals, tracking, and periodic review.
How S&B Consulting Can Assist
S&B Consulting can provide end-to-end support to ensure full compliance with Article 36 and related provisions by offering:
- Identification & Mapping of Connected Persons: Comprehensive review of ownership, management structure, and related parties.
- Functional & Commercial Analysis: Assessment of roles, responsibilities, and value contribution of connected persons.
- Compensation Benchmarking: Market-aligned remuneration benchmarking using UAE-specific industry data.
- Documentation Packages: Preparation of defensible TP-compliant documentation, justification notes, and policy frameworks.
- CT Return Reporting Support: Guidance on disclosures for payments exceeding AED 500,000.
Contact S&B Consulting today for comprehensive support with UAE Corporate Tax compliance and connected persons reporting.
