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02/11/2026
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Imagine a Dubai-based entrepreneur who owns two companies.
Company A is profitable and has sufficient cash reserves. Company B needs AED 500,000 to expand its operations.
Instead of applying for bank financing, the owner transfers AED 500,000 from Company A to Company B.
There is no loan agreement, no repayment schedule and no documented interest rate.
The owner considers it a simple transfer between two businesses under the same ownership.
But how should this arrangement be treated for UAE Corporate Tax purposes?
The answer depends on the actual terms, the relationship between the parties and the applicable UAE tax rules.
As UAE businesses prepare their Corporate Tax returns, related-party financing arrangements deserve careful attention.
A related-party loan is a financing arrangement between persons or entities that meet the relevant relationship conditions under UAE Corporate Tax legislation.
Common examples include:
A parent company lending money to a subsidiary
Two companies under common ownership
A shareholder providing financing to a company
A company extending a loan to a related business
Certain arrangements involving directors or connected persons
Related-party status must be determined under the statutory definitions rather than assumed solely from a business relationship.
The loan may be interest-bearing, interest-free, short-term or long-term.
Although the accounting treatment depends on the arrangement, the principal amount of a genuine loan is not normally treated as ordinary sales revenue simply because the funds are received.
Interest income, interest expenses and related adjustments may create separate tax considerations.
The UAE Corporate Tax framework contains transfer pricing requirements for transactions between Related Parties and Connected Persons.
These rules generally require transactions to follow the arm's-length principle.
In simple terms, the financial arrangement should be assessed against terms that independent parties might reasonably agree under comparable circumstances.
This can involve reviewing:
The amount borrowed
The interest rate
The repayment period
Security or guarantees
The borrower's financial position
The commercial purpose
The rights and responsibilities of each party
A company should not assume that internal financing can be structured without regard to these considerations.
This is one of the most common questions from UAE business owners.
A company might lend money to another group entity without charging interest because both businesses have the same shareholders.
However, the appropriate tax treatment cannot be determined solely from that explanation.
UAE transfer pricing requirements generally apply to related-party loans, including the evaluation of commercially appropriate financing terms.
The Federal Tax Authority has specifically explained that intra-group loan arrangements should be assessed on an arm's-length basis, considering factors such as interest rates and duration.
A zero-interest loan may therefore require further analysis.
The company should evaluate whether the terms can be supported by the relevant facts, legal structure and applicable provisions.
Businesses should avoid assuming that every interest-free loan is automatically acceptable or automatically produces a fixed tax adjustment.
For related-party loans, the arm's-length assessment may involve comparing the agreed financing terms with arrangements available between independent parties.
For example, consider two UAE companies under common ownership.
Company A lends AED 500,000 to Company B for three years.
Suppose the parties agree to charge 6% annual interest.
The annual contractual interest would be AED 30,000, before considering any other terms.
But this calculation does not establish that 6% is automatically an appropriate arm's-length rate.
The rate may need to be assessed against factors such as:
The currency of the loan
Market interest conditions
The borrower's creditworthiness
Loan duration
Whether collateral is provided
Repayment terms
Comparable independent financing arrangements
A rate considered reasonable for one borrower may not be suitable for another.
Documentation supporting the selected rate is therefore important.
Interest expenses may be deductible when the applicable Corporate Tax requirements are satisfied.
However, companies must consider the relevant statutory limitations.
These may include the general interest deduction limitation, specific restrictions and other applicable conditions.
Transfer pricing requirements may also affect the amount recognised for tax purposes.
For example, if a company pays interest to a related business, it should assess whether the loan is genuine, the amount is commercially supportable and any interest deduction is permitted under the relevant rules.
Businesses should not assume that recording interest as an accounting expense guarantees a full Corporate Tax deduction.
Similarly, the lender may need to consider the appropriate recognition of interest income.
A review should consider both sides of the transaction where relevant.
An important accounting distinction is the difference between money invested as capital and money advanced as a loan.
Suppose a shareholder transfers AED 300,000 into a company bank account.
That transfer could represent:
A capital contribution
An additional shareholder investment
A repayable shareholder loan
Another form of funding
The correct classification depends on the legal arrangement and supporting evidence.
A loan generally creates a repayment obligation, while an equity contribution has a different legal and financial character.
The business should review shareholder resolutions, financing agreements, accounting entries and relevant incorporation documents.
Incorrectly classifying shareholder funding may distort the balance sheet and create complications during audits or tax reviews.
The same transaction should not be treated as a loan in one document and as equity in another without a valid explanation.
UAE businesses should maintain appropriate records supporting related-party financing arrangements.
Depending on the circumstances, documentation may include:
Loan agreement
A written agreement identifying the lender, borrower, principal, repayment terms and interest provisions.
Commercial explanation
A description of why the financing was required and how it supports business activity.
Bank transfer evidence
Records establishing when and how the funds were advanced or repaid.
Interest calculations
Schedules showing the contractual interest calculation and the accounting treatment.
Transfer pricing support
Analysis supporting the commercial terms adopted by the parties.
Financial statements
Accounting records that correctly disclose the loan balance and associated income or expenses.
Corporate Tax supporting schedules
Information explaining the treatment adopted in the relevant Corporate Tax return.
The precise documentation and disclosure requirements depend on the taxpayer's circumstances and applicable thresholds.
A common misconception is that transfer pricing is relevant only to multinational corporations.
In reality, UAE transfer pricing requirements can apply to domestic transactions between related businesses.
This can include transactions between two UAE mainland companies, free-zone entities or parties located in different jurisdictions.
The obligation to prepare formal master files or local files is subject to prescribed conditions and thresholds.
However, the absence of a formal-file requirement does not automatically remove the general arm's-length obligation.
Therefore, SMEs should still maintain proportionate records supporting material related-party arrangements.
Businesses should watch for the following problems:
Transferring funds without documenting whether they are loans or equity
Failing to identify related-party transactions in accounting records
Charging interest without commercial support
Leaving significant intercompany balances unreconciled
Omitting repayment terms
Recording loan principal as revenue
Treating interest expenses as automatically deductible
Ignoring loan arrangements when preparing Corporate Tax returns
Assuming free-zone companies have no transfer pricing obligations
These issues can make financial reporting and Corporate Tax calculations more complicated than necessary.
Before completing a Corporate Tax return, businesses should review their shareholder and intercompany balances.
Start by obtaining the general ledger and identifying all amounts due to or from related parties.
Confirm whether each balance represents a loan, trade receivable, capital contribution or another arrangement.
Next, review the agreements, interest calculations and repayment records.
Where relevant, evaluate the commercial terms under the transfer pricing rules.
Finally, ensure the accounting treatment and applicable Corporate Tax disclosures are consistent.
A structured review can help identify issues before the financial statements and tax return are finalised.
Young & Right Accounting & Tax Consultancy provides Corporate Tax, accounting, bookkeeping and financial-reporting support to businesses across the UAE.
Our team can help review shareholder balances, reconcile intercompany transactions, organise supporting records and identify arrangements requiring further Corporate Tax or transfer pricing assessment.
For businesses operating through several companies, regular reviews can reduce the risk of leaving material financing arrangements undocumented.
Related-party loans are common in the UAE, especially among family-owned businesses, investment groups and entrepreneurs operating multiple companies.
However, simple funding arrangements can create important accounting and Corporate Tax questions.
Businesses should document the legal and commercial terms, review the applicable arm's-length requirements and maintain reliable financial records.
A properly documented financing arrangement is easier to explain, account for and assess for Corporate Tax.
Contact Young & Right for professional UAE Corporate Tax and accounting assistance.
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