UAE Corporate Tax – Impact on transactions with connected persons
On 31 January 2022, the UAE Ministry of Finance (MOF) announced the introduction of Federal Corporate Tax (CT) on business profits effective for financial years starting on or after 01 June 2023, with a standard statutory tax rate of 9% and a 0% tax rate for taxable profits up to AED 375,000.
Following the announcement, the MOF released a Public Consultation Document (the Document) on the proposed Corporate Tax (CT) regime in the United Arab Emirates (UAE) with the intent to obtain input/suggestions from the stakeholders. The Document contains the key features of the CT regime.
Concept of Connected Persons
The concept of connected persons is quite specific to the UAE and not prevalent in most of the tax jurisdictions worldwide.
The MOF has distinguished the concept of connected persons from related parties in the Document.
A related party is an individual or entity that has a pre-existing relationship with a business through ownership, control, or kinship. The Document sets out the different rules for determining whether the parties involved in a transaction are considered related parties for UAE CT purposes.
Whereas a person will be considered a connected person if he or she is:
- An individual who directly or indirectly has an ownership interest in or controls the taxable person.
- A director or officer of the taxable person.
- Individuals that are related to the owner, director, or officer of the taxable person to the fourth degree of kinship or affiliation, including birth, marriage, adoption, or guardianship.
- Any partner in an unincorporated partnership is also considered a connected person if there is one partner that is a taxable person.
- A related party of any of the above.
Why is the concept of connected persons included in UAE CT?
In the absence of personal income tax in the UAE, excessive payments to connected persons would erode the taxable base for UAE CT. Therefore, businesses must monitor the payments made to connected persons.
To prevent the tax base erosion, payments to connected persons will be deductible only if the business can prove that:
- The said payments are as per the market value of the service provided; and
- The same is incurred wholly and exclusively for the taxpayer’s business.
What transactions should businesses be mindful of before the implementation of CT?
- Inexplicable increase in salaries paid to the connected persons
- Any additional benefits/incentives paid other than salaries
- Any increase in profit sharing percentage to the connected persons
What could be the documentation requirements?
- Submission of a disclosure form that contains the details of transactions with connected persons.
As per the Document, maintenance of the Master file and Local file is required for related party transactions and not for connected person transactions.
- As a proactive measure, the businesses should gather as much information about the market value of the services provided vis-a-vis salaries and benefits paid to its connected persons.
More clarity is awaited on:
- Guidance for calculating the market value of the service provided.
The monetary threshold (if any) for submitting the disclosure forms.
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