UAE Tax Authority Clarifies the Definition of "Related Party" and Other Key Tax Aspects

July 21, 2025

The UAE Federal Tax Authority (FTA) recently issued clarifications on several key tax concepts, with particular focus on the definition of "related party" under the UAE's tax laws. These clarifications are vital for businesses operating in the UAE, as they provide clearer guidelines for transfer pricing, withholding tax, and other intercompany transactions.

Here are the key points from the FTA's latest clarification:

1. Clarification of "Related Party" Definition

The FTA has provided a detailed definition of "related parties," in line with international tax standards, particularly Organization for Economic Cooperation and Development (OECD) guidelines. Under the UAE Economic Substance Regulations (ESR) and Transfer Pricing rules, a "related party" is generally defined as:

• Individuals or entities that have the ability to control or significantly influence the financial or operating decisions of another entity, or
• Entities that are controlled by the same individual or group of individuals.

Control or significant influence may arise from:

• Ownership stakes, voting rights, or contractual agreements that allow one party to affect the decisions of another.
• Family relationships, where one individual has the ability to control or direct the actions of another due to familial ties.
• Corporate structures, where parent and subsidiary entities, or entities with common ownership, may be considered related parties.

This definition is critical for businesses in terms of compliance with transfer pricing documentation and other tax regulations that apply to related-party transactions.

2.Transfer Pricing Documentation and Compliance

As part of its broader tax reform initiatives, the UAE is enhancing its compliance framework for transfer pricing. Companies that engage in intercompany transactions (with related parties) must ensure that:

• Arm’s length pricing is applied to all cross-border transactions with related parties.
• Adequate transfer pricing documentation is maintained to demonstrate that pricing arrangements are consistent with market norms, ensuring that profits are not artificially shifted to low or no-tax jurisdictions.

The FTA expects businesses to maintain detailed records on the pricing of goods, services, loans, and other intercompany arrangements, and to be able to demonstrate compliance with the arm’s length principle.

3. Withholding Tax on Related-Party Transactions

Another clarification from the FTA pertains to the application of withholding tax (WHT) on payments to related parties. The UAE does not generally impose WHT on most payments, but certain transactions involving related parties may attract WHT, particularly for payments such as royalties, dividends, and interest.

The FTA clarified that:

• The UAE tax law will continue to follow the international best practices concerning WHT rates on cross-border related-party payments, with specific exemptions based on tax treaties.
• Arm’s length tests may be applied to ensure that the amount subject to WHT reflects the true value of the transaction, not artificially inflated or deflated amounts between related parties.

4. Economic Substance Regulations (ESR) and Related Parties

The clarification also touches on the UAE's Economic Substance Regulations, which require entities conducting certain activities in the UAE to have substantial operations in the country. The FTA reiterated that:

• Entities owned or controlled by related parties may come under additional scrutiny to ensure that the business activities conducted are not purely for tax avoidance purposes.
• Transactions between related parties will need to be carefully structured to ensure that they comply with the economic substance requirements.

5. Implications for International Businesses

For multinational enterprises (MNEs) with operations in the UAE, these clarifications underscore the importance of closely reviewing their intercompany relationships and tax structures. The FTA's focus on related-party transactions aligns the UAE’s tax rules with international standards, enhancing the country's attractiveness as a global business hub while ensuring compliance with OECD and EU tax standards.

Next Steps for Businesses

Businesses operating in the UAE should:

• Review their intercompany agreements to ensure they align with the updated definition of related parties.
• Prepare or update transfer pricing documentation to reflect the arm’s length pricing principles and ensure compliance with UAE regulations.
• Assess potential withholding tax implications for cross-border related-party payments and consider the benefits of UAE’s extensive network of double tax treaties.