Why the UAE’s Connected Persons Clarification Matters
The UAE Federal Tax Authority (FTA) has issued a highly anticipated Corporate Tax Public Clarification (CTP010) addressing one of the more practical and sensitive questions businesses have faced since the introduction of UAE Corporate Tax:
Who actually qualifies as a “director” or “officer” under the Connected Persons rules?
The clarification may appear technical at first glance, but its implications are significant for family businesses, owner-managed companies, free zone entities, tax groups, and businesses operating with delegated authority structures.
More importantly, the clarification reinforces a principle that is becoming increasingly central to UAE Corporate Tax:
Substance matters more than titles.
In other words, simply calling someone a “manager,” “director,” or “consultant” may no longer determine the tax treatment. The FTA will instead look at who actually exercises authority, controls decisions, and has the ability to legally or commercially bind the business.
For many UAE businesses, that changes the analysis entirely.
Why CTP010 Matters for UAE Businesses
Under Article 36 of the UAE Corporate Tax Law, payments or benefits made to Connected Persons are deductible only if they:
- Reflect Market Value; and
- Are incurred wholly and exclusively for the purposes of the business.
This means businesses cannot simply pay excessive compensation, management fees, or benefits to related individuals without proper commercial justification.
The challenge for many businesses has been determining exactly who qualifies as a Connected Person in the first place.
CTP010 provides long-awaited guidance on this issue.
And the FTA’s position is clear:
The analysis should focus on actual authority and conduct, not merely formal job titles.
What the UAE FTA Clarified About “Directors”
According to the clarification, a “director” generally refers to a person who formally sits on the board of directors or an equivalent governing body of the company.
Where a company does not have a formal board structure, the concept may extend to individuals occupying equivalent governance positions depending on:
- The applicable laws;
- The company’s constitutional documents; and
- The practical governance structure of the business.
However, one of the most important aspects of the clarification is what the FTA did not accept:
A person is not automatically considered a “director” simply because the word appears in their title.
This is especially relevant in businesses where titles may be used loosely for commercial, operational, or cultural reasons.
The Meaning of “Officer” Is Much Broader
The clarification takes a more substance-based approach when defining an “officer.”
An individual may qualify as an officer where they:
- Plan, direct, or control company activities;
- Make strategic financial, operational, or commercial decisions;
- Approve budgets or major transactions;
- Hold authority to legally bind the business;
- Operate under a power of attorney (POA);
- Are named in trade licenses or board resolutions with binding authority.
Importantly, the FTA draws reference from IAS 24 (Related Party Disclosures), which focuses heavily on functional authority and decision-making power rather than formal designation.
This means a person may effectively be treated as an officer for UAE Corporate Tax purposes even if their employment title suggests otherwise.
Why Substance Over Form Matters in UAE Corporate Tax
CTP010 is part of a broader trend in UAE tax enforcement.
The FTA continues to emphasize that tax outcomes should reflect commercial reality rather than formal structures alone.
In practice, businesses should now ask:
- Who actually controls the company?
- Who approves strategic decisions?
- Who can sign contracts or commit the business legally?
- Who negotiates financing arrangements?
- Who has operational control over key business functions?
For many privately owned UAE businesses, the real decision-makers may not always align neatly with formal organizational charts.
And that creates both compliance and deductibility risks.
Why Family Businesses and Owner-Managed Companies Should Pay Attention
The clarification is particularly important for:
- Family-owned businesses;
- Closely held private companies;
- Free zone entities;
- Tax groups;
- Companies with delegated authority structures;
- Businesses where ownership and management overlap.
In many of these structures, individuals may exercise significant control without formally sitting on a board or holding executive titles.
For example:
- A shareholder operating under a POA;
- A family member approving financial decisions;
- A senior executive negotiating contracts;
- An individual informally directing operational strategy.
Under the FTA’s approach, these individuals may still fall within the Connected Persons framework depending on the facts and circumstances.
Deductibility Risks Under Article 36
The practical consequence of being classified as a Connected Person is significant.
Payments or benefits made to such individuals are deductible only if they:
- Reflect Market Value; and
- Relate wholly and exclusively to the business.
This means businesses should carefully review:
- Salaries;
- Management fees;
- Bonuses;
- Housing or travel benefits;
- Consultancy arrangements;
- Director compensation structures.
Unsupported or excessive payments could become non-deductible for Corporate Tax purposes.
Recommended Actions Before Corporate Tax Filing
Following CTP010, UAE businesses should consider reviewing:
- Their Connected Person population;
- Delegated authority structures;
- Board resolutions and POAs;
- Compensation arrangements;
- Related party documentation;
- Market Value support for payments and benefits.
Businesses should also ensure sufficient documentation exists to support:
- Who holds actual authority;
- Why payments are commercially justified; and
- How deductibility positions were determined.
For many businesses, this will require a more detailed governance and authority analysis than originally anticipated.
A Broader Shift in UAE Tax Enforcement
The Connected Persons clarification reflects a broader evolution in the UAE Corporate Tax landscape.
The FTA is increasingly moving toward internationally aligned tax principles that focus on:
- Economic substance;
- Functional control;
- Commercial reality; and
- Documentation support.
This aligns with wider transfer pricing and anti-avoidance concepts seen globally.
For UAE businesses, the message is becoming increasingly clear:
Titles alone are no longer enough.
The real focus is on who actually controls the business.