In a recent Corporate Tax audit of an owner-managed UAE company, the Federal Tax Authority ('FTA') proposed to add back every element of the pay of its shareholder-director (the 'person') that went beyond the person's written employment terms. The amounts themselves were not the issue. The paperwork was.
The case shows how formally the FTA reads Article 36 of Federal Decree-Law No. 47 of 2022 (the 'CT Law'). For owner-managed businesses across the UAE, it is a useful test of whether their own remuneration files would survive the same review. It also bears out the expectation set out in our 'Aurifer 10 Spotlights for 2026' that Transfer Pricing enforcement would move from compliance reviews to substantive audits.
What the FTA Looked At
The company's sole shareholder was also a director and an employee. Over an extended audit of an early Tax Period, the FTA repeatedly asked for the documents behind the person's pay. It requested the person's employment contracts, the company's bonus policy, and the approval and computation of a management incentive.
It then asked for the contracts, bonus letters and payroll records of other senior staff. That request signalled that the FTA was comparing the person's paperwork with the standard applied to ordinary employees.
At the exit meeting, the FTA indicated it would add back three items.
- A management incentive worth a multiple of the person's annual fixed pay, approved by a letter the person signed after the year had closed.
- A small ad hoc cash bonus, for which no contract or policy provided.
- The part of the annual bonus above the ceiling in the company's bonus policy.
Fixed salary and allowances set out in the contract were accepted. So was the annual bonus up to the policy ceiling.
Deductibility Comes Before Market Value
Article 36(1) of the CT Law allows a payment to a Connected Person only to the extent it corresponds with the Market Value of the service provided and is incurred wholly and exclusively for the business. Article 33 separately excludes dividends, profit distributions and similar benefits paid to an owner. We discuss how these rules apply to shareholders and directors more generally in 'Tax Planning Strategies for Individual Business Owners in the UAE'.
The company defended the incentive with a Transfer Pricing benchmark. It set a target operating margin within the range of comparable firms and paid the profit above that target to the person. The FTA did not engage with the benchmark. In the audit discussions it took the informal position that a payment must first be shown to be a genuine business expense before its value is tested. That threshold question is the general deductibility test, which we cover in 'UAE Corporate Tax: A Practical Guide to Deductible Business Expenses (2025)'.
Several facts weighed against the company. Net profit fluctuated markedly across years, and the margin fell sharply in the year the incentive was introduced. The incentive appeared as a separate bonus line item in the profit and loss account. The approval was signed by the person receiving it, executed well after the date it bore, and contained no formula or performance criteria.
Taken together, the FTA read the incentive as an allocation of profit rather than pay for services. The ad hoc bonus illustrates the same approach at small scale. It was disallowed in full for one reason only, the absence of a document.
What Owner-Managed Businesses Should Do Now
The lesson is that Connected Person pay is defensible only to the extent it traces back to a written entitlement fixed in advance. We consider undocumented variable pay to an owner to carry a high risk of challenge.
- Document variable pay before the Tax Period starts: Set the formula, the criteria and any cap in the contract or a remuneration policy.
- Separate the approval from the recipient: A sole shareholder should pass a dated resolution in advance. A second director or adviser should sign off the outcome where possible.
- Benchmark the person, not only the company: Executive pay data for comparable roles addresses the Article 36 test more directly than a margin benchmark.
- Avoid residual profit formulas: An incentive that absorbs all profit above a target looks like a distribution, particularly when profits swing. Year-end adjustments to reach a target margin raise similar questions, as we explain in 'Year-End Transfer Pricing Adjustments in the UAE'.
- Follow the staff process: Pay the owner through the same appraisal cycle, payroll and timing as employees.
- Keep the audit trail contemporaneous: Execute approvals before the accrual or payment, and make sure dates match.
- Review earlier periods: Where a deduction already claimed lacks a written basis, consider a voluntary disclosure under Article 10 of Federal Decree-Law No. 28 of 2022 on Tax Procedures before an audit begins.
How Aurifer Can Help
Aurifer reviews remuneration arrangements for owner-managed businesses, prepares Connected Person documentation and benchmarking, and supports taxpayers through FTA audits and reconsideration requests. To discuss your position, contact our Transfer Pricing and Corporate Tax team.
This article is for general information only and is based on audit practice. The article reflects the law and practice as at its date, is not tax or legal advice on any specific arrangement, and may not be relied upon for penalty protection.