Executive Summary

As UAE businesses navigate the Corporate Tax regime, one area that demands urgent attention is payments to Connected Persons. The Federal Tax Authority (FTA) is increasingly scrutinizing these transactions, and non-compliance can result in denied deductions, penalties, and potential double taxation.

In this article, we break down the Connected Person provisions under Article 36 of the UAE Corporate Tax Law and provide actionable guidance to ensure your business remains compliant.

WHO IS A CONNECTED PERSON?

Under Article 36 of Federal Decree-Law No. 47 of 2022, a Connected Person is defined more broadly than traditional related parties to prevent profit shifting in the absence of personal income tax:

• Owners/Shareholders of the taxable entity
• Directors and Officers (including Managing Directors of LLCs)
• Related Parties of the above (extended to fourth degree of kinship)

Why the strict definition?
In the absence of personal income tax in the UAE, there’s a risk that business owners might reduce corporate tax liability by inflating payments to themselves or related individuals. The FTA has implemented these rules to prevent profit shifting and maintain the integrity of the corporate tax base.

WHICH PAYMENTS ARE COVERED?

The Connected Person rules apply to a broad range of payments and benefits, including:

• Salaries and bonuses
• Directors’ fees and remuneration
• Consultancy and professional fees
• Rent for property
• Interest on loans
• Management and service fees
• Benefits-in-kind (housing, vehicles, etc.)

THE TWO CRITICAL CONDITIONS FOR DEDUCTIBILITY

For any payment to a Connected Person to be tax-deductible, it must satisfy BOTH conditions under Article 36(1):

Condition 1: Market Value Requirement

The payment must reflect the market value of services or benefits provided, determined using the Arm’s Length Principle (ALP). This means the price should be the same as if you were dealing with an unrelated third party under similar circumstances.

Condition 2: Business Purpose Test

The expenditure must be:

• Wholly and exclusively incurred for business purposes
• Supported by a Need-Benefit Analysis
• Not capital in nature

⚠️ CRITICAL WARNING: If these conditions are not met, the FTA will deny the deduction, increasing your taxable income and potentially triggering penalties.

TRANSFER PRICING METHODS

The UAE recognizes 5 OECD transfer pricing methods. For Connected Person compensation:

USE CUP (Comparable Uncontrolled Price) – the primary method that compares your payment with market rates for similar roles. Support it with TNMM (Transactional Net Margin Method), which verifies compensation is reasonable as a percentage of profit (typically 10-30% depending on industry).

CPM (Cost Plus Method) applies only to service fees from CP entities, not individual salaries.

RPM (Resale Price Method) never applies to remuneration – it’s for trading goods only.

PSM (Profit Split Method) is rarely used and only for partnerships with unique contributions.

Bottom line: Always use CUP as primary + TNMM as verification = strongest defense.

DISCLOSURE REQUIREMENTS & THRESHOLDS

Connected Person Schedule (Part of CT Return)

Threshold: Required when the aggregate value of transactions with a Connected Person exceeds AED 500,000 in the tax period.

Filing Timeline: Alongside the Corporate Tax return (within 9 months from the end of the tax period)

Transfer Pricing Documentation

Local File & Master File required when:

• Your taxable revenue is AED 200 million or more, OR
• You’re part of an MNE group with consolidated revenue of AED 3.15 billion or more

Submission: Within 30 days of FTA request.

CONCLUSION

Connected Person compliance under UAE Corporate Tax is mandatory, complex, and high-risk. The FTA’s intense focus on managerial remuneration means shareholder-executives and Key Management Personnel face the highest scrutiny.

Key Rules: All Connected Person payments must be at arm’s length – regardless of amount. Use CUP method for market benchmarking, verify with TNMM profit ratios, and document both contemporaneously. The AED 500,000 threshold triggers disclosure, not compliance.

Critical Action: Don’t wait for an FTA audit. Proactive compliance costs 70-85% less than post-audit remediation. Missing documentation, excessive compensation vs. profit, and lack of benchmarking are major red flags.

The Bottom Line: Prevention is cheaper than defense. Proper benchmarking now saves penalties, interest, and professional fees later.

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DISCLAIMER

This article is provided by RBS Ravis Auditors LLC for general information and educational purposes only. It does not constitute professional tax, legal, financial, or accounting advice tailored to your specific circumstances.

The information is based on UAE Federal Decree-Law No. 47 of 2022, related Cabinet Decisions, Federal Tax Authority guidance, and OECD Transfer Pricing Guidelines as of December 2024. Tax laws continue to evolve.

While every effort has been made to ensure accuracy, RBS Ravis Auditors LLC makes no warranties about completeness or suitability of this information. Consult qualified tax professionals before making decisions. We accept no liability for actions taken based on this content.

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