Transactions with Related Parties and Connected Persons

Related party transactions matter because they can change taxable profit and raise review questions if pricing or paperwork looks weak. A clean record trail and fair pricing logic usually keep the risk low in day-to-day operations. These transactions are common in groups and shared service setups. The goal is not to avoid them, but to document them like any serious third-party deal.

Why Related Party Deals Get Extra Attention?

Tax and audit reviews often focus on related-party dealings because control sits inside the same group. This can create pricing choices that do not match market behaviour, even without bad intent.

A simple example: a UAE trading company pays AED 350,000 as a “management fee” to a group entity. If there is no scope, no deliverables, and no proof of work, the expense may be challenged during review.

Good support is usually practical, not complex. It includes a clear contract, consistent invoices, and proof that services or goods were genuinely delivered.

Who Counts as a Related Party or Connected Person

A related party is generally an entity or person with a relationship that allows influence or control. A connected person is often an individual linked to ownership or management in a way that can affect decisions.

In practice, finance teams treat these as “inside-circle” dealings that need stronger documentation. The exact classification depends on facts and current guidance, so it helps to keep a written relationship map.

How to Identify Related Party Transactions

The easiest way is to start with a master list of owners and group entities. That list should be linked to vendor and customer masters inside the accounting system.

A second step is to scan payment runs for names that repeat across entities. Shared addresses and recurring intercompany invoices are common clues.

A third step is operational. Ask which suppliers or service providers sit inside the same group, even if invoices show a different trade name.

Where Companies Usually Miss Related Party Links

Most misses happen due to weak onboarding controls. Vendor creation forms often capture TRN and bank details, but they miss ownership links and related entity names.

Another common miss is staff reimbursements linked to owners. These can look like normal costs, but they may be connected person payments that need separate review notes.

A practical fix is to add one field in vendor setup: “Group or owner link.” This keeps reviews faster during month end and year end.

Related Party Transactions Examples

Examples usually fall into a few patterns that repeat across industries.

A logistics firm may charge AED 18,000 per month to a sister company for warehouse space. A services firm may bill AED 55,000 per quarter for shared admin staff. A retail group may buy stock worth AED 900,000 through a related distributor.

These are not automatically risky. They become risky when pricing seems unrealistic or evidence is missing.

Pricing and Arm’s Length Terms

Arm’s length pricing means the deal should broadly look like a market deal. It does not mean the price must match a perfect benchmark, but it should be explainable with reasonable support.

For example, if a group entity provides IT support, the charge can be based on headcount and ticket volume. If a related landlord provides office space, the rent logic can be supported using comparable rents in the same area.

A short internal pricing note is often enough. It should state the method used and why it fits the service or asset.

Documentation That Usually Makes These Deals Defensible

Documentation should match real operations and real cash flow. The best packs are easy to scan and easy to trace.

Keep these items organised per transaction stream:

• Signed agreements and any scope annexures
• Invoices that match contract terms and billing dates
• Proof of delivery such as reports, emails, or service logs
• Payment proof tied to invoice numbers and ledger entries
• Internal approvals that show who signed off and why

If the deal involves shared staff or shared assets, add a simple allocation sheet. It should show how the split was calculated and who approved it.

Related Party Transactions Policy

A related–party policy is useful because it forces consistency. It also removes guesswork when staff change or when a new entity is added to the group.

A practical policy usually answers four things: who must be flagged, how pricing is set, what approvals are needed, and what evidence must be stored.

It helps to keep the policy short. A two-page policy that is followed beats a long policy that sits unused.

Practical Approval Rules That Work in Real Companies

A clear approval flow reduces disputes later. It also supports internal governance, even in small businesses.

A workable approval setup can look like this:

• Any related party invoice above AED 25,000 needs finance review and management approval
• Any connected person payment needs a purpose note and proof of benefit to the business
• Any contract with a related entity needs a signed scope and pricing logic note
• Any change in pricing needs a short change note and approval record

These rules are simple, but they prevent most “why did we pay this” issues during reviews.

Related Party Transactions Audit

During a related party transactions audit, reviewers usually test two areas: pricing logic and substance. They also check that disclosures and supporting files exist, based on the entity’s obligations and current guidance.

Reviews often start with the general ledger. Then they move to vendor masters, board approvals, and sample invoices. If the first sample looks weak, reviewers usually expand the sample size.

The easiest way to stay ready is to keep a dedicated folder for related party schedules. That folder should include the relationship map, contracts, pricing notes, and a quarterly reconciliation.

Common Red Flags That Trigger Extra Questions

These patterns often create follow-up queries:

• Large fees with vague descriptions like “support services”
• Payments that repeat monthly with no work evidence
• One-off transactions booked near year end with quick reversals
• Charges that rise sharply without a reason note
• High margin shifts between entities without operational change

A red flag is not a verdict. It is a signal that the file needs stronger explanation and clearer proof.

Month End Controls That Keep The Ledger Clean

Monthly controls keep problems small. They also reduce late surprises during corporate tax and audit work.

A simple control stack can include a related party ledger review each month. It should check that invoices are posted to the correct accounts and that attachments exist in the document system.

A second control is bank reconciliation discipline. When bank lines match invoice references, the trail stays clean.

A third control is a quarterly related party summary. It should show total charges per entity and a short note on what the charge covered.

How This Impacts Corporate Tax And VAT Readiness

Related party costs can affect taxable profit if they are not well supported. They can also affect VAT treatment if tax invoices are missing or incorrectly issued, based on current guidance and actual facts.

A UAE company paying AED 240,000 per year in shared service fees should be able to show a real service trail. If the charge is real, the business usually wants it accepted without extended review.

This is why file hygiene matters. A strong pack reduces delays, reduces rework, and keeps management reporting stable.

How Arnifi Assists Transactions with Related Parties?

Arnifi helps businesses set up bookkeeping workflows, accounting systems, and documentation packs that support related party tracking and audit readiness. Also, our expert accounting and bookkeeping team can also help maintain clean evidence folders for VAT and corporate tax compliance work.

FAQs

What Is The First Step To Control These Transactions?

Start with a relationship map and link it to vendor and customer masters. This helps flag connected names early and prevents misclassification during posting and payment approvals.

Do All Related Party Deals Need Formal Contracts?

Formal contracts are often the safest option, especially for recurring charges. For small items, a signed scope note and clear invoice evidence can still support the transaction.

How Often Should Pricing Be Reviewed?

Many businesses review pricing once each year or after a major change in volume. Keep a short note showing why pricing stayed the same or why it changed.

What Records Should Be Kept For Review?

Keep agreements, invoices, proof of delivery, and payment trails in one folder per entity. Add a simple allocation sheet for shared services and keep approvals easy to trace.

Can Small Businesses Face Queries Too?

Yes, size does not remove review risk. Smaller firms often face questions when fees look unusual, or evidence is missing, so basic controls and documentation still matter.