The UAE Federal Tax Authority (FTA) has issued a Public Clarification regarding the interpretation of the terms “director” and “officer” for the purposes of identifying “Connected Persons” under Article 36 of the UAE Corporate Tax Law.
Key points
The FTA has clarified the following definitions, which apply for determination of the ‘Connected Persons’ of a Taxable Person:
Directors: the FTA has clarified that the definition covers any person holding a position on the board of directors or an equivalent governing body (including but not limited to a board of trustees or board of governors), as determined by the applicable law or constitutional documents of the Taxable Person. Merely having “director” in a job title does not make someone a “director” for Corporate Tax (CT) purposes.
Officers: the term “officer” has been clarified to include any person who meets any of the below requirements:
- Possesses the authority and responsibility for planning, directing, and controlling the activities of a Taxable Person (in line with the framework set out in IAS 24); or• Has authority to make strategic decisions in relation to financial, operational, or commercial matters; or
- Has authority to enter into agreements or approve actions that legally or contractually bind the Taxable Person.
The term does not include persons without final/ultimate strategic or discretionary decision-making, or legally or contractually binding, authority.
Payments or benefits provided to Connected Persons (meeting the above terms) are subject to additional deductibility restrictions and reporting requirements, including:
Deductibility restrictions: payments and benefits to Connected Persons are only deductible for CT purposes to the extent they correspond to the market value of the service or benefit provided by the Connected Person and only if incurred wholly and exclusively for business purposes.
Disclosure requirements: transactions and arrangements with Connected Persons exceeding AED 500,000 are required to be disclosed in the Connected Persons schedule forming a part of the CT return. The threshold is assessed for each Connected Person separately, however each Connected Person assessment needs to aggregate transactions and arrangements with Connected Persons’ Related Parties (which include juridical persons as well as natural persons that are family members up to the fourth degree of kinship).
Where an individual meets both the definition of Connected Person and Related Party however, the Clarification notes they will be treated as a Related Party for CT purposes. There is currently no further clarification or administrative guidance on how this should be disclosed or applied in practice for the filing of Related Party disclosure forms.
The additional deductibility restrictions (as outlined above and detailed under Article 36 of the UAE CT Law) should not apply to payments and benefits to Connected Persons made by the Taxable Persons that are subject to the regulatory oversight of a competent authority in the UAE or whose shares are traded on a Recognised Stock Exchange. Notwithstanding this, as the Clarification links the terms ‘Director’ and ‘Officer’ with decision-making and binding authority over the Taxable Person, such ‘Directors’ and ‘Officers’ (as well as other types of Connected Persons) could also be regarded as Related Parties of the Taxable Person and therefore subject to UAE’s transfer pricing requirements.
Action points
Taxable Persons (including legal persons as well as unincorporated partnerships and other persons treated as Taxable Persons for UAE Corporate Tax purposes) should consider:
- Reviewing governance structures and tax governance documentation to ensure accurate identification of “directors” and “officers” for CT purposes. Where the governance structure is not formalised and relevant documentation does not provide clear identification of “directors” and “officers”, it is recommended to update these.
- Map Related Party disclosures under IAS 24 against the FTA’s Connected Person disclosures and identify mismatches (if any) to prepare for disclosure requirements.
- Review the payments and benefits provided to Connected Persons against the applicable additional deductibility restrictions.
