Arm’s length compensation for the owners and rainmakers under the UAE Connected Persons regime
Arm’s length compensation for the owners and rainmakers under the UAE Connected Persons regime
Client. We were approached by a UAE professional services company owned in equal shares by several individuals who also serve as its directors and primary fee-earners. All client relationships are personal to the owners – clients engage the firm on the strength of each owner’s individual professional reputation and expertise. The company delivers complex legal projects to its clients. The substantive work on those engagements is performed by the owners personally. Annual compensation per owner significantly exceeds AED 500,000.
Issue. In the UAE payments to Connected Persons are deductible only to the extent they correspond to the Market Value of the service or benefit provided (Art. 36 of the Federal Decree-Law No. 47 of 2022). Payments above AED 500,000 per person per year must be disclosed in the Corporate Tax return, with a Market Value figure for the services provided. Below the Local File threshold, the company must still maintain reasonable records substantiating the arm’s length level of these payments.
The substantiation exercise is non-trivial for owner-operated professional firms. Salary benchmarks do not adequately capture compensation of individuals who simultaneously act as owners, directors and fee-earners. Profitability-based methods do not fit a structure where substantive value is generated by the individuals rather than the entity. The FTA has not yet published examination practice for such arrangements.
Our approach. We developed a multi-layered substantiation strategy comprising:
- a primary line built around transactional structuring at the formation stage of the Company. It draws on the natural arm’s length character of the relationship between the founders at that point in time and applies OECD comparability principles adapted to the UAE Connected Persons regime;
- a parallel line based on external market sources, prepared so that it can be deployed independently of the primary line if the latter is challenged;
- a structured assessment of recharacterization risk, GAAR exposure under Article 50, and the applicable administrative and criminal penalty framework, including the interaction of the two substantiation lines in the event of an FTA inquiry.
Outcome. The Company filed its Corporate Tax return reporting Market Value equal to the actual amounts paid. No TP adjustment was required, and the full compensation to the owners remained deductible for Corporate Tax purposes. The deliverable comprised reasonable records and supporting documentation held ready for an FTA request, together with structural recommendations to be implemented before the next reporting period.