DISCLOSURE OF CONTROLLED TRANSACTIONS (RELATED PARTY OR CONNECTED PERSON) IN THE UAE CORPORATE TAX RETURN

With the UAE’s implementation of its Corporate Tax (CT) regime under Federal Decree-Law No. 47 of 2022, transfer pricing rules and related disclosure requirements have become central to compliance. Controlled transactions (transactions with related or connected parties) must not only follow the arm’s length principle, but many of them must be disclosed explicitly in the corporate tax return using prescribed schedules/forms. This transparency helps the Federal Tax Authority (FTA) assess whether related-party dealings are priced fairly and meet legal requirements.

Legal & Regulatory Framework

Corporate Tax Law (Decree-Law No. 47 of 2022): Articles 34, 55 (and related) set out the obligations relating to related party / connected persons transactions and the requirement to disclose them.

Ministerial Decision No. 97 of 2023: On Transfer Pricing Documentation Requirements. Defines when documentation (Master File, Local File, etc.) is required.

FTA Corporate Tax Guide (CTGTP1, October 2023): Provides detailed guidance on what needs to be in the disclosure schedules, thresholds, deadlines, etc.

Key Concepts

Related Parties / Related Party Transactions: Generally, entities that have a certain ownership/control relationship. These are governed by the “arm’s length principle,” meaning transactions should take place as if between independent parties under similar circumstances.

Connected Persons: Natural persons (and their related parties) who are owners, directors, or otherwise connected to the entity; arrangements that may not be purely business arm’s length. Payments or benefits to connected persons are also covered in disclosure rules.

Controlled Transactions: Those between related parties or connected persons; can include supply of goods, services, financing, royalties/intellectual property, transfers of assets or liabilities, and so on.

What Must Be Disclosed in the Tax Return

As part of the CT return, certain schedules/forms related to controlled transactions must be submitted, depending on whether thresholds are met. There are two main disclosure schedules:

Related Party Transaction Schedule

If the taxpayer’s transactions with related parties (aggregate) exceed AED 40 million during the tax period, this schedule must be completed. Once the AED 40 million threshold is passed, individual categories of transactions (goods, services, interest, IP etc.) that exceed AED 4 million each must also be disclosed.

Disclosures include:

-Names of related parties

-Tax residence of related parties

-The gross income received from related parties / expenses paid to related parties

-The type/category of transactions (goods, services, etc.)

-The transfer pricing method used

-The arm’s length value of the transaction

-Any adjustment if the transaction was not at arm’s length.

Connected Persons Schedule

This applies if payments or benefits to connected persons (including their related parties) in aggregate exceed AED 500,000 in the tax period. For each connected person exceeding that threshold, disclosure is required.

Disclosures include:

-The identity of the connected person

-The nature of payment/benefit or arrangement

-The gross value of payments/benefits

-The market value of the service or benefit (if different)

Documentation & Supporting Requirements

Disclosure alone is not enough; taxpayers must maintain supporting documentation to justify that their controlled transactions comply with the arm’s length principle. Key points:

Contemporaneous documentation: Should be prepared at or before filing the tax return for the period in which the controlled transactions are undertaken.

Master File & Local File: If certain thresholds are met (e.g. being part of a multinational group with consolidated group revenue ≥ AED 3.15 billion, or the taxable person’s own revenue ≥ AED 200 million), then a Master File and a Local File are required.

Country-by-Country Reporting (CbCR): Also applies for large groups meeting the high revenue threshold.

Arm’s Length Principle & Adjustments

The value of transactions with related parties / connected persons must be at market value (arm’s length). If a transaction is not at arm’s length, adjustments may be required.

If the arm’s length value differs from what was recorded in the financial statements or what was transacted, the difference must be disclosed, and the taxable income may need to be adjusted.

Some downward adjustments (i.e. if an expense is being reduced) may require FTA’s approval. Upwards adjustments (that increase taxable income) generally are accepted.

Penalties & Risks of Non-Disclosure or Non-Compliance

Failing to properly disclose or to maintain required documentation carries risk. While explicit penalties vary (and some are administrative), the FTA can challenge controlled transactions, re-assess taxable bases, impose fines, and adjust tax liabilities. Also, absence of documentation can lead to assumed non-compliance and adjustments unfavorable to the taxpayer.

Practical Considerations & Challenges

–Identifying all related parties / connected persons and classifying transactions by type properly is non-trivial. Businesses may have multiple intercompany or intra-group arrangements that need scrutiny.

-Valuation and methods: Choosing the right transfer pricing method and documenting facts, assumptions, comparable, etc., in sufficient detail.

-Collecting data especially for cross-border transactions or with non-resident-related parties.

-Threshold monitoring: Entities must monitor whether they cross the thresholds (AED 40m, AED 500,000 etc.), since it triggers disclosure.

-Systems, accounting, internal control: To reliably capture, record, and report information needed for disclosure schedules and supporting documentation.

-Free zone businesses, exempt persons etc.: Need to check whether any special rules or exemptions apply, but even so, arm’s length compliance generally still required.

Summary & Best Practices

-Evaluate early whether your business crosses any thresholds for disclosure or documentation (AED 40 million aggregate, AED 4 million per category, AED 500,000 for connected persons, revenue thresholds for Master/Local file etc.).

-Maintain contemporaneous documentation: Right from when controlled transactions occur, so that evidence and analyses are fresh.

-Use appropriate TP methods: Ensure method selection is defensible and documented, particularly for large or complex transactions.

-Implement internal tracking of related party & connected person transactions: Systematically record details (party, value, type, justification etc.).

-Engage professional advice: Legal/tax/transfer-pricing expertise can help with complex transactions, international element, valuation etc.

-Review periodically business structure & transactions to avoid surprises at year end.

Disclosure requirements for controlled transactions in the UAE bring a higher level of transparency and accountability in corporate tax reporting than many businesses may have been used to. Proper compliance involves not just filling in schedules in the CT return, but also maintaining detailed documentation, applying arm’s length pricing, monitoring thresholds, and being ready for potential adjustments by the FTA. For businesses with related or connected party arrangements, being proactive is essential to avoid penalties or adverse tax adjustments.