UAE Corporate Tax: what changes at the AED 375,000 threshold
How the 0% and 9% bands work and what to prepare before your first return.
The one rule behind it all
Transactions between a business and its related parties must be priced at arm's length: the price independent parties would agree in the same circumstances. If they are not, the Federal Tax Authority can adjust taxable income to what an arm's length price would have produced.
The rule exists to stop profit being moved to where it is taxed less, for example into a free zone company, a loss-making sister company or the owner personally.
Who counts as related or connected
| Group | Typical examples in an owner-managed business |
|---|---|
| Related parties | Companies under common ownership or control of 50% or more; an individual and relatives up to the fourth degree; a company and the individuals who control it; partners in the same partnership |
| Connected persons | Owners of the business, directors and officers, and people related to them |
The two overlap. The practical difference is that payments to connected persons, such as an owner's salary or a director's fees, are deductible only to the extent they reflect market value for the services actually provided.
Where owner-managed businesses get caught
- Owner and family salaries. A salary well above what a hired manager would earn for the same role may be partly non-deductible. Pay to family members who do little work is a common audit question.
- Shareholder and sister-company loans. Interest-free loans, or loans at rates no bank would offer, may need an arm's length interest rate, which then flows into both companies' taxable income.
- Shared costs and management fees. One company paying staff, rent or systems used by the whole group needs a reasonable basis for recharging those costs.
- Property and assets owned personally. Rent paid to an owner for a warehouse or office should be at market rent, and free use of the owner's assets may need pricing too.
- Free zone and mainland companies under one owner. Pricing between them is closely watched, because it can shift income into the 0% regime.
Most problems are not about the price itself. They are about having no agreement, no invoice and no explanation of how the price was set.
How an arm's length price is set
The law recognises the standard methods used internationally, including comparing with similar independent transactions, cost plus a mark-up, resale price, the transactional net margin method and profit split. For most owner-managed businesses the practical answer is simpler: use market evidence you can show, such as a bank's quoted loan rate, a rent valuation, a salary survey, or a cost-plus margin on shared services.
Records and disclosures
Every business should keep enough evidence to show its related-party prices are arm's length. On top of that, the rules set thresholds above which more is required:
- A transfer pricing disclosure form with the Corporate Tax return when related-party and connected-person transactions are significant.
- A formal master file and local file for larger businesses and members of large international groups.
Thresholds are set by ministerial decision and can change, so check the current figures before each return. Businesses that elect Small Business Relief are spared the documentation requirements, but the arm's length rule still applies to them.
Five steps to take this year
- Map the relationships. List every related party and connected person, and every flow of money or services between them.
- Put it in writing. Simple written agreements for loans, services, rent and shared costs, signed by both sides.
- Price with evidence. Keep a short note of how each price was set, with the market evidence attached.
- Invoice and settle. Raise invoices and settle balances, so transactions in the accounts match the agreements.
- Review owner pay. Benchmark salaries and benefits for owners and family members against the roles they actually perform.
These steps also make the year-end work easier; see the Corporate Tax return checklist for December year-ends.
This article is general information based on UAE Corporate Tax law and guidance from the Federal Tax Authority and the Ministry of Finance. It is not advice for your business, and thresholds change. Ask Hassan to review your related-party arrangements.
Official sources: Federal Tax Authority · UAE Ministry of Finance
