Doing Business With Family or Group Companies? What Your Accounts Must Show

The deal that looks normal, until you know who is on the other side

Think of a trading company in Dubai. It rents its warehouse from the managing director's brother. It buys packing material from a firm owned by the owner's wife. It took an interest-free loan from the owner last year. Each deal may be perfectly fair. But a bank, an investor or a buyer reading the accounts cannot judge that unless they know who sits on the other side of the table.

That is the purpose of IAS 24 Related Party Disclosures. It does not stop anyone dealing with people close to them. It makes sure the reader of the accounts is never left guessing.

Why close parties are treated differently

Close parties can agree terms strangers never would. A company sells to its parent at cost. An owner charges his company double the market rent for a shop he owns personally, and the profit quietly moves to him. A sister company gets 180 days to pay while every other customer gets 30.

The effect can exist even with no transaction at all. A parent may tell a subsidiary to stop using a long-standing supplier because another group company now does the same work, or to stop spending on research. The numbers change, and no invoice ever shows why. That is why IAS 24 requires the relationships to be disclosed even where nothing was traded.

Who counts as a related party under IAS 24

IAS 24 defines close members of the family as those family members who may be expected to influence, or be influenced by, that person in their dealings with the business. The list it says is included is: the person's children and spouse or domestic partner, the children of that spouse or partner, and the dependants of the person or of the spouse or partner.

Two lists: the accounts and the tax return

This is where UAE businesses most often go wrong. The Corporate Tax Law has its own definition, in Article 35, and it is wider on family. Two or more natural persons related within the fourth degree of kinship or affiliation, including by adoption or guardianship, are Related Parties for tax purposes. That reaches brothers, brothers-in-law and cousins automatically.

The tax law then builds on that family link. Under Article 35(1)(b), a company is a Related Party of an individual who, together with their Related Parties, owns 50% or more of it or controls it, so the owner's brother is a Related Party of the owner's company. Under Article 36(2), a Connected Person of a company includes its owners, its directors and officers, and any Related Party of those people. The MD's brother who owns the warehouse is therefore a Connected Person of the company, even if the MD owns no shares.

The consequences differ by label. Transactions with Related Parties must meet the arm's length standard under Article 34. Payments to Connected Persons are deductible only if and to the extent they match Market Value and are incurred wholly and exclusively for the business, under Article 36, subject to the exceptions in Clause 6. And where these transactions pass a materiality threshold, a transfer pricing disclosure form goes in with the tax return. A relationship that is a judgement call under IAS 24 can be fixed by statute for tax.

The practical answer is one register that tags each party twice: whether it is a related party for IAS 24, and whether it is a Related Party or Connected Person for Corporate Tax.

What the accounts must show

1. Who controls you, even if nothing was traded

A subsidiary must name its parent and, if different, the ultimate controlling party. If neither publishes consolidated financial statements for public use, it must also name the next most senior parent that does. Control shapes a business whether or not invoices pass between the parties.

2. What key management are paid

Total key management personnel compensation is disclosed, and split into five categories:

If key management services are provided by a separate management entity, the business discloses the amounts it incurred for those services instead of the individuals' pay.

3. The detail of each type of transaction

Where there were related party transactions in the period, the accounts describe the relationship and give, at a minimum:

• the amount of the transactions;
• the outstanding balances, including commitments, with their terms and conditions — whether they are secured, the consideration to be provided in settlement, and any guarantees given or received;
• provisions for doubtful debts on those balances; and
• the expense recognised in the period for bad or doubtful debts due from related parties.

These are shown separately for the parent, entities with joint control or significant influence, subsidiaries, associates, joint ventures, key management personnel, and other related parties.

Almost any dealing counts: purchases or sales of goods or property, services, leases, research transferred within a group, licences, loans and equity contributions, guarantees, commitments, and one party settling liabilities for the other. No price has to be charged. A free service is still a related party transaction.

Lighter disclosure for government-related entities

Picture a government-owned airline. Its fuel comes from a state oil company, its airport is state-run, its bank is state-owned and its power comes from a state utility. Every one is technically a related party, and listing each transaction would bury the reader.

So an entity controlled, jointly controlled or significantly influenced by a government is exempt from the full transaction disclosures for that government and for other entities it controls or influences. It must instead name the government and the nature of the relationship, disclose the nature and amount of each individually significant transaction, and give a qualitative or quantitative indication of transactions that are significant collectively. Judging significance means asking whether a transaction is large, priced off-market, outside day-to-day operations, reported to regulators or senior management, or subject to shareholder approval.

Warning signs your business needs a review

• The owner or a director has lent money to the company with no written agreement.
• Office, warehouse or staff housing is rented from a family member or a sister company.
• One group company pays salaries or bills for another, to be settled later.
• Management fees or cost recharges move between group companies without a clear basis.
• Balances owed by sister companies have sat on the balance sheet for years.
• Directors' housing, cars or school fees are paid by the company but not tracked as pay.
• Nobody holds one up-to-date list of every company the owners and their families own.

A practical checklist

Related party dealings are normal and often sensible. What damages trust is hiding them. A business that sets out its close relationships openly gives banks, investors and buyers one less reason to doubt its numbers.

How BIFI Partners helps

BIFI Partners helps owner-run businesses and groups across the UAE get this right before the auditor or the Federal Tax Authority asks. We map related parties and the dealings between them, build the two-way register for the accounts and the tax return, flag pricing that could attract a transfer pricing adjustment, confirm whether the disclosure form or a Local File applies, and draft the IAS 24 note.