This article is for general guidance only and does not constitute tax advice. Please consult with a qualified advisor regarding your specific circumstances.
If your business has transactions with related parties or connected persons, UAE Corporate Tax law requires those transactions to meet the arm's length principle — and, depending on your size, to be documented and disclosed. Before any of that can happen, the first question has to be answered correctly: is the other party actually a Related Party or Connected Person under the law?
This isn't always obvious. The definitions go well beyond "we're related" or "we work together" they're built on specific ownership percentages, control tests, and family relationships defined in the UAE Corporate Tax Law. Getting this classification wrong is one of the most common and costly mistakes businesses make heading into a Corporate Tax filing.
Here's a breakdown of how the classification actually works.
When Are Two Natural Persons Related Parties?
Two individuals are Related Parties where there is kinship or affiliation between them.
Kinship means common blood ties determined by an individual's ancestors or a shared ancestor. This includes relationships by adoption or guardianship, so kinship isn't limited to a strict blood line.
Affiliation means a relationship by marriage, or where one person's spouse is related by kinship to the other person.
The law recognizes kinship up to the 4th degree, and the test extends through marriage as well. The 1st degree covers parents and children, plus the same relationships through a spouse. The 2nd degree extends to grandparents, grandchildren, and siblings, again including a spouse's equivalents. The 3rd degree brings in great-grandparents, great-grandchildren, uncles, aunts, nieces, and nephews plus a spouse's versions of the same. And the 4th degree reaches great-great-grandparents, great-great-grandchildren, grand-uncles and aunts, grandnieces and nephews, and first cousins, once again including those relationships through marriage.
When Are Two Persons Related Parties Through Ownership?
Article 35 sets out three separate ownership tests any one of them is enough to establish a Related Party relationship.
An individual who owns a company: A natural person and a company are Related Parties where that individual, alone or together with their own Related Parties, holds 50% or more ownership in the company, directly or indirectly.
One company that owns another: Two companies are Related Parties where one of them, alone or with its Related Parties, owns 50% or more of the other.
Two companies under one owner: Any person (individual or company) who owns 50% or more of two separate companies makes those two companies Related Parties of each other even if neither company holds any shares in the other at all. Common ownership is what links them, not mutual shareholding.
When Are Two Persons Related Parties Through Control?
Beyond ownership, two persons can also become Related Parties through direct or indirect control. Meeting any one of the following four tests is enough:
Exercises 50% or more of the voting rights of another person
Determines the composition of 50% or more of the board of directors
Receives 50% or more of the profits of another person
Determines, or exercises significant influence over, the conduct of the business and affairs of another person
The first three tests are fixed 50% thresholds in practice, they usually just confirm a relationship that was already obvious. The fourth test, significant influence, has no fixed percentage. It's judgment-based, turning on the facts and circumstances of the specific relationship, and it's the one that most often needs deeper analysis.
What Is a Connected Person?
A Connected Person is a distinct category from a Related Party, and it matters because any payment or benefit a business gives to a Connected Person is deductible only up to the Arm's Length Price, and only where it's incurred wholly and exclusively for the business.
A person is a Connected Person if they are:
An individual who directly or indirectly owns an interest in, or controls, the taxable person (or a Related Party of that individual)
A director or officer of the taxable person (or a Related Party of that director or officer)
A partner in an unincorporated partnership (and any Related Parties of that partner)
A quick but important note on titles: whether someone counts as a "director" or "officer" comes down to the seat itself or the real authority they hold not the job title on their business card. Someone with genuine strategic decision-making or binding authority is an officer even without the title; a titled person without that real authority is not.
Also worth knowing: if a person is both a Related Party and a Connected Person of the same taxable person, they're treated only as a Related Party the categories don't stack.
A Few Categories Are Exempt From the Cap
Article 36(6) exempts certain taxable persons from the Arm's Length Price restriction on Connected Person payments entirely:
Publicly traded companies whose shares trade on a recognised stock exchange
Regulated entities under the oversight of a competent UAE authority
Cabinet-designated persons, as determined in a future Cabinet decision
Three Separate Compliance Layers And None of Their Thresholds Line Up
Once a Related Party or Connected Person relationship exists, three separate questions apply each with its own, unrelated threshold:
1. Arm's Length Principle always applies, no threshold. Every controlled transaction must meet the arm's length standard, from the very first dirham. There's no size test and no carve-out by entity type.
2. Benchmarking scales with risk.
Low value-adding services can rely on a cost + 5% safe harbour, with no detailed study needed, if a four-part test is met.
A group-wide TP policy can support pricing only if the transactions genuinely match it and it already reflects local or regional comparables.
Everything else requires a full comparability study, refreshed at least every three years with annual financial updates.
3. Documentation scales with size.
Every controlled transaction requires reasonable supporting records from the first dirham, with no revenue threshold these need to be producible within 30 days of an FTA request. Once transactions cross a materiality threshold, a Disclosure Form covering Related Party and Connected Person transactions must be filed with the Tax Return, within 9 months of the period end. Businesses with group revenue of AED 3.15 billion or more, or their own revenue of AED 200 million or more, must additionally maintain a Master File and Local File, kept contemporaneous and producible within 30 days of a request. And UAE-headquartered MNE Groups with consolidated revenue of AED 3.15 billion or more carry a further obligation: notifying by fiscal year-end and filing a Country-by-Country Report within 12 months.
Even businesses that don't cross any of the documentation thresholds still have to meet the arm's length principle on any controlled transaction they do have and the FTA can request supporting workpapers at any time.
Where to Start
If your business has any dealings with related parties or connected persons a shared shareholder, a family member on the cap table, an entity under common control the right first step is confirming exactly where you stand against each of these three layers before your filing deadline arrives.
Download the full guide for a detailed breakdown of every test, exemption, and filing deadline covered above:
[Download: Related Parties & Connected Persons — UAE Transfer Pricing Guide (PDF)]
Not sure where your business falls? Get in touch with our Transfer Pricing team for a review of your related-party positions ahead of your filing deadline.