UAE: Payment to Connected Person To Follow Arm's Length Standard

In a previous edition of the newsletter, I discussed the requirement that transactions between related parties must be conducted at arm’s length click to read. In this edition, I will cover Article 36 of Federal Decree-Law No. 47 of 2022 (FDL 47) – ‘Payments to Connected Persons.’

Article 36 mandates that payments and benefits provided to connected persons by a taxable person must be at market value. For quick reference, Paragraph 1 of Article 36 is quoted below:

Without prejudice to the provisions of Article 28 of this Decree-Law, a payment or benefit provided by a Taxable Person to its Connected Person shall be deductible only if and to the extent the payment or benefit corresponds with the Market Value of the service, benefit or otherwise provided by the Connected Person and is incurred wholly and exclusively for the purposes of the Taxable Person’s Business.

Key elements of the above regulation:

• Applies to payments or benefits provided by a taxable person to a connected person.
• Such payments or benefits must qualify as tax-deductible expenditure under Article 28 of FDL 47.
• They must relate to services or benefits provided by the connected person to the taxable person’s business.
• These payments or benefits must be incurred wholly and exclusively for the purpose of the taxable person’s business.
• They must reflect the arm’s length price of the services or benefits provided by the connected person to the taxable person’s business.

A person shall be considered a connected person of a taxable person if that person is:

a) An owner of the taxable person or a related party of the owner.

b) A director or officer of the taxable person or a related party of such individuals.

c) In the case of an unincorporated partnership, any other partner in the same partnership or their related parties.

Article 36(6) excludes certain categories of taxable persons from the scope of this article. These include:

• Taxable persons whose shares are traded on a recognized stock exchange.
• Taxable persons subject to the regulatory oversight of a competent authority in the UAE.
• Any other person as determined by a decision issued by the Cabinet.

When there is a transaction or arrangement between a taxable person and its connected person, the taxable person must comply with Article 55 of FDL 47, as read with Ministerial Decision No. 97 of 2023, regarding Transfer Pricing Documentation .