Related Party Transactions Corporate Tax reviews can become difficult when a UAE company deals with a parent company, subsidiary, shareholder, director, or another business under common ownership. Management fees, intercompany loans, shared services, royalties, rent, and purchases between group companies can all require closer review. The transaction may be genuine, but auditors still need to understand why it took place, how the amount was calculated, and what records support it. UAE Corporate Tax rules require transactions with related parties to follow the arm’s-length principle. This makes proper records important when the financial statements and tax information are reviewed.
Audit Services UAE can help businesses review related-party balances, agreements, invoices, payment records, and tax information before an audit starts. A review can identify missing documents, unexplained balances, unusual charges, and differences between accounting records and tax information. This is useful for companies dealing with local or overseas group entities and other parties that fall within the UAE Corporate Tax rules.
Why Related Party Transactions Get Attention During a UAE Audit
Related party transactions receive attention during a UAE audit because they can affect both financial reporting and Corporate Tax calculations. When a company deals with a parent company, subsidiary, shareholder, director, or another connected business, the auditor needs to understand the reason for the transaction and the terms agreed between the parties. The review may cover management fees, intercompany loans, shared expenses, royalties, rent, purchases, and sales.
Auditors may compare agreements, invoices, payment records, ledger entries, and related-party balances to check that the accounting records are properly supported. They may also consider whether the transaction follows the applicable arm’s-length requirements under UAE Corporate Tax rules. Clear records help explain the commercial purpose, pricing, and settlement of each transaction. Missing documents, unusual amounts, or unexplained balances can lead to additional questions during the audit.
Related Parties Versus Connected Persons Under UAE Corporate Tax
Related Parties and Connected Persons are separate concepts under UAE Corporate Tax. Related Parties generally relate to ownership, control, or specified relationships between individuals and entities. Connected Persons can include owners, directors, officers, and certain related individuals.
The distinction matters because different Corporate Tax provisions can apply to these relationships. Companies should identify both categories before reviewing their transactions. This helps avoid treating every payment to a shareholder, director, or group company in the same way. The Federal Tax Authority provides separate guidance on Related Parties and Connected Persons under the UAE Corporate Tax framework.
| Point | Related Party | Connected Person |
| Main basis | Ownership, control, or specified relationship | Connection to an owner, director, officer, or related person |
| Common example | Parent and subsidiary company | Owner or director |
| Main tax concern | Arm’s-length pricing | Payments or benefits and applicable market-value rules |
| Audit focus | Agreements, pricing, balances, and transaction records | Payment details, benefit, approval, and supporting records |
| UAE Corporate Tax reference | Article 35 | Article 36 |
The First Things Auditors Check in a Related Party Transaction
The initial review normally starts by identifying the parties and understanding the transaction. The auditor then checks whether the accounting entry can be supported by documents and whether the terms make commercial sense.
- Who is the related party? The auditor may review the ownership structure, shareholder information, group chart, and company records.
- What is the business purpose? A management fee, loan, royalty, or group recharge should have a clear reason behind it.
- Is there a written agreement? Service agreements, loan agreements, lease contracts, and licensing arrangements can help explain the terms.
- How was the amount calculated? Large or unusual amounts may require calculations, allocation workings, or pricing support.
- Did the transaction actually take place? Invoices, correspondence, bank records, reports, and other evidence can support the accounting entry.
- Does the pricing follow the arm’s-length principle? The UAE Corporate Tax framework requires relevant transactions with Related Parties to be considered under transfer pricing rules.
A Related Party Audit UAE review can help identify these issues before the auditor raises questions. Businesses can check their transaction records, supporting evidence, and reconciliations in advance.
Related Party Transactions That Can Attract Auditor Questions
Some transactions tend to receive more attention because they involve significant amounts, unusual terms, or services that can be difficult to prove. The following areas deserve a close review:
- Management fees: The auditor may ask what services were provided, who provided them, and how the fee was calculated.
- Intercompany loans: The review may cover the loan agreement, principal, interest rate, repayment terms, security, and outstanding balance.
- Interest-free financing: An interest-free arrangement may require an explanation of the commercial reason and the terms agreed between the parties.
- Royalties: Auditors may review the ownership of intellectual property, licence terms, usage, and the basis used to calculate the royalty.
- Intercompany goods and services: Purchase prices, sales prices, invoices, delivery records, and margins may be reviewed.
- Related-party rent: The auditor may check the lease agreement, property use, rental amount, and payment history.
These transactions do not automatically indicate a problem. The main concern is whether the company can explain the transaction and support the amount through reliable records.
What Auditors Compare Against the General Ledger
The general ledger is an important starting point, but auditors may compare it with other records to check whether the transaction has been recorded correctly. Differences between documents can lead to further questions.
- Intercompany schedules: Balances should agree with the amounts recorded in the accounting system.
- Signed agreements: Contract terms should match the transaction recorded in the accounts.
- Invoices: Invoice dates, descriptions, quantities, and amounts should support the ledger entry.
- Bank statements: Payment records can confirm whether amounts recorded as paid were actually settled.
- Financial statements: Related-party balances and disclosures should agree with the underlying accounting records.
- Corporate Tax records: Tax calculations and disclosures should be consistent with the relevant transaction information.
A difference does not always mean that the transaction is incorrect. The company should be able to explain the difference and provide records supporting the final figures.
Companies preparing related-party balances and disclosures for independent financial statement review can use External Audit Services to examine whether accounting records, intercompany balances, agreements, supporting evidence and financial statement disclosures are consistent and adequately supported.
UAE Corporate Tax Disclosure Threshold for Related Party Transactions
The UAE Corporate Tax return includes a Related Party Transaction Schedule for businesses that meet the applicable reporting threshold. According to the FTA Corporate Tax Returns Guide, the schedule applies when the aggregate value of transactions with all Related Parties exceeds AED 40 million during the relevant Tax Period. After this threshold is exceeded, transactions within a particular category need to be disclosed when the aggregate value for that category exceeds AED 4 million. The categories include areas such as goods, services, and intellectual property. Dividends between Related Parties are excluded when calculating these thresholds for the schedule.
The disclosure threshold should not be treated as a general exemption from transfer pricing requirements. A transaction below the reporting threshold can still need to be considered under the arm’s-length principle. Companies should therefore review both the transaction itself and the reporting requirements that apply to their particular circumstances.
What Documents Can Support a Related Party Transaction?
Good documentation makes it easier to explain a transaction during an audit. The exact records will depend on the nature of the transaction, but businesses should keep documents that show the relationship, commercial purpose, amount, and settlement.
- Ownership and group records: Keep shareholding information, group charts, and records showing the relationship between the parties.
- Signed agreements: Maintain service agreements, loan contracts, lease agreements, licensing arrangements, and other relevant contracts.
- Invoices and transaction records: Keep invoices, purchase orders, delivery records, and supporting correspondence.
- Pricing records: Retain pricing calculations, cost allocations, comparable information, and other records supporting the amount charged.
- Payment and reconciliation records: Keep bank statements, intercompany confirmations, ledger reconciliations, and details of outstanding balances.
Audit Services UAE can help businesses review these records against their accounting entries before an external audit or tax review. The purpose is to identify missing links in the transaction trail while records can still be obtained or corrected.
How to Prepare for a Related Party Transaction Audit
A structured review before the audit can help management identify gaps in its records and deal with them before the auditor starts asking questions.
Step 1: Identify All Related Parties
Review ownership, common control, group companies, shareholders, directors, and other relevant relationships. Do not depend only on an old related-party list in the accounting system.
Step 2: List the Transactions
Prepare a schedule covering management fees, loans, purchases, sales, royalties, rent, reimbursements, and other transactions involving Related Parties or Connected Persons.
Step 3: Match Transactions With Supporting Records
For every major transaction, check the agreement, invoice, ledger entry, payment record, and relevant correspondence. Any missing document should be investigated.
Step 4: Review the Pricing
Check how the amount was calculated and whether the pricing can be supported under the arm’s-length principle. Ministerial Decision No. 97 of 2023 sets out the UAE transfer pricing documentation requirements and the conditions under which a master file and local file may be required.
Step 5: Reconcile the Final Figures
Compare the related-party schedule with the general ledger, financial statements, bank records, and Corporate Tax information. Differences should be investigated and explained before the audit.
Related-party purchases can also affect inventory records when goods move between connected businesses. Stock Count Services can help verify physical inventory against recorded quantities where stock transactions need further review.
Related Party Transactions and IAS 24: What Is the Difference?
IAS 24 deals with related-party disclosures in financial statements, while UAE Corporate Tax rules deal with tax treatment and the arm’s-length principle for transactions involving Related Parties and Connected Persons. IAS 24 covers matters such as related-party relationships, transactions, outstanding balances, and commitments that may need to appear in the financial statements.
UAE Corporate Tax rules separately address transfer pricing and the pricing of relevant transactions. This means financial statement disclosure and Corporate Tax review are connected, but they are not the same exercise. A company should therefore check both areas rather than assuming that an IAS 24 disclosure automatically satisfies its Corporate Tax responsibilities. Keeping separate review schedules can also help management identify differences between accounting disclosure, tax reporting, and supporting transaction records.
What Happens If a Related Party Transaction Cannot Be Supported?
A transaction with limited supporting evidence may lead to further questions during an audit or tax review. The outcome depends on the transaction, amount, documents available, and applicable UAE rules.
- More documents may be requested: The auditor may ask for agreements, invoices, payment records, correspondence, or management explanations.
- The accounting treatment may be reviewed: Missing evidence can make it harder to confirm the classification or amount recorded.
- The pricing may be questioned: The company may need to provide support for the arm’s-length result.
- The Corporate Tax calculation may need review: A transfer pricing adjustment can affect taxable income where the applicable requirements are not met.
- Disclosure information may need correction: Differences between the financial statements, schedules, and tax return may need to be investigated.
- Transfer pricing records may be requested: Where the relevant documentation requirements apply, the company should have the required records available.
Unexplained or unusual related-party transactions may need a closer review of the underlying evidence. Forensic audit services can help examine transaction records and identify issues that require further investigation.
The corporate tax related party rules should therefore be reviewed together with the accounting records, transaction agreements, and supporting evidence.
Where Audit Services UAE Adds Value Before Related-Party Records Are Finalised
A useful pre-audit review should establish a complete trail from the related-party register to the agreement, calculation, invoice or journal, payment record, intercompany reconciliation, financial statement disclosure and Corporate Tax information. Any mismatch between these records should be investigated before the reporting package is finalised.
Management should also separate documentation gaps from pricing questions. A transaction may be fully recorded in the ledger but still require stronger evidence of its commercial purpose, allocation method or arm’s-length basis. Resolving those issues early gives the finance team more time to obtain supporting documents and reconcile differences before they become audit queries.
Conclusion
Related Party Transactions Corporate Tax reviews are not limited to checking a figure in the accounts. A UAE company should be able to explain who the other party is, why the transaction took place, how the amount was calculated, and which documents support the entry. Good records can make questions easier to answer and can help management identify gaps before the audit begins.
Audit Services UAE can support businesses with related-party transaction reviews, account reconciliations, document checks, and audit preparation. A review can also help compare financial statements with Corporate Tax records and identify areas that may need attention before submission.
FAQs
What is a related party transaction under UAE Corporate Tax?
A related party transaction is a transaction between parties connected through ownership, control, or specified relationships. UAE Corporate Tax rules may require the transaction to follow the arm’s-length principle.
What transactions are commonly reviewed during a related party audit UAE?
Auditors commonly review management fees, intercompany loans, royalties, rent, shared services, purchases, sales, and other group-company transactions. They may check the agreements, invoices, payments, and pricing support.
What is the UAE Corporate Tax disclosure threshold for related party transactions?
The Related Party Transaction Schedule generally applies when aggregate transactions with Related Parties exceed AED 40 million in the relevant Tax Period. Category-level disclosure can apply above AED 4 million.
Do related party transactions need transfer pricing support in the UAE?
Yes, applicable Related Party transactions should be considered under the arm’s-length principle. The required transfer pricing records depend on the transaction and the company’s circumstances.
What documents should a company keep for related party transactions?
Companies should keep agreements, invoices, ownership records, pricing calculations, bank records, ledger reconciliations, and relevant correspondence. These records help support the transaction during an audit.