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Payments to connected persons

Applies
FY2024 onwards
Reviewed
Rule
UAE-CT-CONNPAY-2024.1
By

Are payments to connected persons deductible in the UAE?

Only up to the market value of what the connected person provided, and only if wholly and exclusively for the business. Listed and regulated payers are exempt.

Per Federal Decree-Law No. 47 of 2022, Article 36, Payments to Connected Persons

Without prejudice to Article 28, a payment or benefit provided by a Taxable Person to its Connected Person is deductible only if and to the extent the payment or benefit corresponds with the Market Value of the service, benefit or other thing the Connected Person provided, and is incurred wholly and exclusively for the purposes of the Taxable Person's Business. The restriction does not apply to a Taxable Person whose shares are traded on a Recognised Stock Exchange, one subject to the regulatory oversight of a competent authority in the State, or any other Person the Cabinet determines.

The Connected Person counterpart to the arm's length standard, sitting on top of Article 28 rather than replacing it. Where the payment exceeds Market Value, the excess is disallowed and the rest survives.

The restriction, its measure and its exclusions

36(1) — two requirements, and a partial disallowance

  • The payment or benefit must correspond with the Market Value of what the Connected Person provided — deductible only if and to the extent it does
  • It must be incurred wholly and exclusively for the purposes of the Taxable Person's Business
  • The article applies without prejudice to Article 28, so the general rule still has to be satisfied on the amount that survives

"If and to the extent" is not a switch

An overpayment to a Connected Person is disallowed as to the excess and allowed as to the rest. A rule answering yes or no would be wrong on the common case, which is an overpayment rather than a sham.

36(5) — how Market Value is established

The relevant provisions of Article 34 apply, as the context requires. So Market Value comes from the same comparables the arm's length rule needs — which is why the figure is the reader's and nothing here derives it.

36(6) — Persons the restriction does not apply to

Entity-level exclusions, tested first. A Market Value restriction reported as satisfied for an excluded Person would report a test that never applied.

  • (a) A Taxable Person whose shares are traded on a Recognised Stock Exchange
  • (b) A Taxable Person subject to the regulatory oversight of a competent authority in the State
  • (c) Any other Person determined in a decision issued by the Cabinet at the suggestion of the Minister

Order of testing

  1. 1

    Inputs requiring your determination

    Any input a person must decide and has not decided stops the computation. The Market Value and the purpose are asked for only where the restriction can apply at all.

  2. 2

    Persons to whom the restriction does not apply

    Article 36(6). Outside Clause 1 entirely, so no Market Value limit is computed and none is met.

  3. 3

    A payment to a Connected Person

    The restriction limits payments to a Connected Person. Where the recipient is not one, Article 28 decides deductibility and the Related Party question under Article 34 is separate.

  4. 4

    Wholly and exclusively for the purposes of the Business

    Tested before the Market Value measure: a payment that fails it is not restricted to Market Value, it is not deductible.

  5. 5

    Correspondence with Market Value

    The amount is deductible up to the Market Value of what was provided, and the excess is not. Both figures appear.

Examples

Illustrative scenarios — ours, not the authority’s — each computed live by this rule. Change any fact and the outcome is the rule’s, not a hand-written answer.

A director's fee above market

A company pays a director AED 1,800,000 for services whose Market Value it determines to be AED 1,200,000, wholly for the business.

Computed

Of the AED 1,800,000 provided to the Connected Person, AED 1,200,000 is deductible as computed: Article 36(1) allows it only if and to the extent it corresponds with the Market Value of AED 1,200,000 of what was provided, so the excess of AED 600,000 is not deductible. Based on the figures you supplied. Article 36 applies without prejudice to Article 28, so an amount within Market Value must still be deductible under the general rule; the two are not alternatives. Market Value is established under Article 34 as the context requires, and the figure above is yours.

Workings

Payment or benefit providedas supplied
AED 1,800,000
Market Value of what the Connected Person providedArticle 36(5), applying Article 34 as the context requires — as supplied
AED 1,200,000
DeductibleArticle 36(1) — only to the extent it corresponds with Market Value
AED 1,200,000
Excess over Market Value, not deductibleArticle 36(1)
AED 600,000

Decided by the correspondence with market value

A shareholder service charge at market

A charge of AED 900,000 from an owner for services whose Market Value is AED 950,000, so the whole amount is within it.

Computed

Of the AED 900,000 provided to the Connected Person, AED 900,000 is deductible as computed: Article 36(1) allows it only if and to the extent it corresponds with the Market Value of AED 950,000 of what was provided, and the whole amount is within that value. Based on the figures you supplied. Article 36 applies without prejudice to Article 28, so an amount within Market Value must still be deductible under the general rule; the two are not alternatives. Market Value is established under Article 34 as the context requires, and the figure above is yours.

Workings

Payment or benefit providedas supplied
AED 900,000
Market Value of what the Connected Person providedArticle 36(5), applying Article 34 as the context requires — as supplied
AED 950,000
Deductiblethe whole amount, within Market Value
AED 900,000
Excess over Market Value, not deductiblenil
AED 0

Decided by the correspondence with market value

A benefit with no business purpose

A payment of AED 400,000 to an owner for a personal expense, which is not incurred wholly and exclusively for the business.

Computed

No deduction for the AED 400,000 as computed: Article 36(1) allows a payment or benefit to a Connected Person only where it is incurred wholly and exclusively for the purposes of the Taxable Person's Business, and you have indicated it is not. The Market Value limit is not reached.

Workings

Payment or benefit providedas supplied
AED 400,000
Deductiblenil — not incurred wholly and exclusively for the purposes of the Business
AED 0

Decided by the wholly and exclusively for the purposes of the business

A listed company

The same director's fee paid by a Taxable Person whose shares are traded on a Recognised Stock Exchange, which Article 36(6)(a) puts outside the restriction.

Computed

The Article 36(1) restriction does not apply as computed: Article 36(6)(a) — a Taxable Person whose shares are traded on a Recognised Stock Exchange. No Market Value limit is computed and none is met. The deductibility of the AED 1,800,000 is decided by Article 28 and whatever else applies to it.

Workings

Payment or benefit providedas supplied
AED 1,800,000
Restricted by Article 36(1)nil — the Taxable Person is outside Article 36(1)
AED 0

Decided by the persons to whom the restriction does not apply

A payment to an unconnected supplier

An ordinary trade payment of AED 300,000 to a supplier who is not a Connected Person.

Computed

The Article 36(1) restriction does not apply as computed: it limits a payment or benefit provided to a Connected Person, and you have indicated the recipient is not one. The deductibility of the AED 300,000 is decided by Article 28, and whether the recipient is a Related Party is a separate question under Article 34.

Workings

Payment or benefit providedas supplied
AED 300,000
Restricted by Article 36(1)nil — the recipient is not a Connected Person
AED 0

Decided by the a payment to a connected person

Try it

Supply the facts and this rule computes the outcome in your browser, live. Leave a determination undecided and it blocks the result — it is never read as a no.

Not computed yet

2 inputs still need your determination:

  • Are the Taxable Person's shares traded on a Recognised Stock Exchange, is it subject to the regulatory oversight of a competent authority in the State, or has the Cabinet determined it to be outside this restriction?
  • What payment or benefit was provided to the Person?

Computed in your browser from the figures you supply. Nothing is sent anywhere, and the result is a computation against a rule — reference, not tax advice.

Sources

Share this rule

Reference, not tax advice.

Pankaj Agarwal — Tax Technology Leader