Related Party Transactions Audit: Requirements & Best Practices

Your auditor flagged AED 2.5M in "related party transactions" requiring disclosure, but you're confused because those are just normal business dealings with your other companies—why does IAS 24 require disclosing these transactions, what exactly counts as a "related party," and what happens if you don't disclose them properly in your financial statements? Related party transactions (RPTs) are among the most common audit findings in UAE businesses (appearing in 38% of management letters according to our data), but many business owners don't understand IAS 24's broad definition of related parties (includes shareholders, directors, family members, and entities they control), the extensive disclosure requirements (nature, amounts, terms, balances), and the serious consequences of non-disclosure (qualified audit opinion, UAE Corporate Tax transfer pricing penalties, UBO regulation violations).

With 37 years auditing 28,000+ UAE businesses (95% of which have related party transactions due to family ownership structures, group companies, and shareholder loans), Farahat & Co's audit teams identify and test RPTs daily across every industry and jurisdiction. Our deep experience with UAE's unique ownership structures—where family members often own multiple entities, shareholders provide informal loans, and management fees flow between sister companies—ensures complete, compliant RPT identification and disclosure.

This comprehensive related party transactions audit guide explains:

• IAS 24 definition of related parties: 7 categories including control, key management, family members
• Common UAE examples: shareholder loans, inter-company sales, shared services, management fees
• Mandatory disclosure requirements: What must be disclosed beyond just transaction amounts
• Auditor identification procedures: How auditors find undisclosed related parties during fieldwork
• Arm's length testing: How auditors verify pricing is commercial (critical for UAE Corporate Tax)
• Transfer pricing implications: FTA documentation requirements for RPTs > AED 200K
• UBO (Ultimate Beneficial Owner) connection: Why accurate RPT disclosure helps UBO compliance
• Common audit findings: Top 5 RPT issues that trigger qualified opinions

Whether you're a family-owned DMCC trading company with AED 15M sales to your mainland sister company, a holding company with AED 8M shareholder loan payable wondering if disclosure is required, or a CFO trying to understand why your auditor needs details about your director's wife's consulting company, this expert guide—based on thousands of RPT audits—demystifies this complex but critical area.

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What Are Related Parties? IAS 24 Complete Definition

The 7 Categories of Related Parties

IAS 24 defines a party as "related" to your entity if it falls into ANY of these categories:

Category 1: Parent Company

• Entity that controls your company
• Direct or indirect control (> 50% ownership or control of board)

Example:

• Your company: ABC Trading LLC (DMCC)
• Parent: XYZ Holdings Ltd (DIFC) owns 100% of ABC
• Related party: XYZ Holdings

Category 2: Subsidiaries

• Entities that your company controls
• Direct or indirect control

Example:

• Your company: ABC Holdings (DIFC)
• Subsidiary 1: ABC Services LLC (Dubai mainland) - 70% owned
• Subsidiary 2: ABC Logistics FZE (JAFZA) - 100% owned
• Related parties: Both subsidiaries

Category 3: Fellow Subsidiaries (Sister Companies)

• Entities under common control (same parent)
• Often called "sister companies"

Example:

• Parent: Family Holding Company
• Company A: Electronics Trading LLC (your company)
• Company B: Electronics Services LLC (sister company)
• Company C: Electronics Retail LLC (sister company)
• Related parties: Companies B and C (common parent)

Category 4: Associates & Joint Ventures

• Entities where you have significant influence (usually 20-50% ownership)
• Joint ventures where you're a venturer

Example:

• Your company owns 30% of Supply Chain Solutions LLC
• You have board representation
• Related party: Supply Chain Solutions

Category 5: Key Management Personnel (KMP)

• Directors (executive and non-executive)
• CEO, CFO, COO, and other senior management
• Anyone with authority/responsibility for planning, directing, controlling the entity

UAE Common Examples:

• Managing Director
• General Manager
• Finance Manager (if significant authority)
• Board members

Category 6: Close Family Members of KMP or Controlling Parties

• Spouse
• Children (including adult children)
• Spouse's children
• Dependents of individual or their spouse

Example:

• Your Managing Director: Ahmed Al Mansoori
• Related parties:
  • Ahmed's wife (Fatima)
  • Ahmed's children
  • Fatima's children from previous marriage
  • Ahmed's elderly parents living with him (dependents)

Category 7: Entities Controlled by KMP or Their Close Family

• Any company owned/controlled by directors, KMP, or their families

Example:

• Your CFO (Sara Al Hashimi) owns 80% of:
  • Consulting Services LLC
  • Real Estate Investment FZE
• Related parties: Both entities (controlled by your CFO)

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Common UAE Related Party Scenarios

Scenario 1: Family Business Structure

Al Mansouri Family Companies:

• Father (Sheikh Ahmed) owns:
  • 100% of Mansouri Holdings (parent)
  • Mansouri Holdings owns:
    • 100% of Mansouri Trading (DMCC) ← Your company
    • 100% of Mansouri Real Estate (DIFC)
    • 60% of Mansouri Manufacturing (JAFZA)

Related Parties to Mansouri Trading:

• Mansouri Holdings (parent)
• Mansouri Real Estate (sister company)
• Mansouri Manufacturing (sister company)
• Sheikh Ahmed (ultimate controlling party)
• Sheikh Ahmed's wife and children (close family)
• Any other companies owned by family members

Scenario 2: Shareholder-Manager Structure

Your Company: Tech Solutions LLC (Dubai South)

• Shareholders:
  • Shareholder A (50%): Mr. Khalid - also serves as Managing Director
  • Shareholder B (50%): Ms. Noura - passive investor

Related Parties:

• Mr. Khalid (shareholder + KMP)
• Ms. Noura (shareholder with significant influence)
• Mr. Khalid's wife and children
• Ms. Noura's spouse and children
• Any companies owned by Khalid or Noura

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Mandatory Disclosure Requirements Under IAS 24

What MUST Be Disclosed in Financial Statements

For ALL Related Party Transactions:

1. Nature of the Relationship

Must describe HOW the party is related:

• "ABC LLC is a fellow subsidiary under common control of XYZ Holding"
• "Mr. Ahmed Al Mansoori is the Managing Director and 60% shareholder"
• "Consulting Services LLC is controlled by the CFO"

2. Transaction Amounts (by Category)

Must disclose amounts for EACH type of transaction:

• Purchases of goods: AED X
• Sales of goods: AED Y
• Services received: AED Z
• Services provided: AED A
• Lease payments: AED B
• Loan interest: AED C

3. Outstanding Balances

Must disclose year-end balances:

• Accounts receivable from related parties: AED X
• Accounts payable to related parties: AED Y
• Loan receivable: AED Z
• Loan payable: AED A

4. Terms and Conditions

Must describe:

• Payment terms (30 days, 90 days, on demand, etc.)
• Interest rates (if applicable)
• Security/collateral (if any)
• Repayment schedule

5. Whether Transactions Are at Arm's Length

Must state:

• "Transactions were conducted at arm's length terms" OR
• "Pricing may not be indicative of arm's length transactions" OR
• Disclose specific pricing basis

6. Guarantees Provided or Received

Must disclose:

• Company guaranteed shareholder's personal loan: AED X
• Parent company provided guarantee for company's bank facility: AED Y

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Key Management Personnel Compensation Disclosure

Special Disclosure Category (ALWAYS Required):

Must disclose KMP compensation in these categories:

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Example Disclosure:

Key management personnel compensation:

• Short-term employee benefits: AED 2,400,000
• Post-employment benefits: AED 180,000
• Total: AED 2,580,000

Who counts as KMP for disclosure?

• All directors (executive and non-executive)
• CEO/General Manager
• CFO
• Other C-level executives with authority

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Real-World UAE Related Party Transaction Examples

Example 1: Inter-Company Sales (Sister Companies)

Structure:

• ABC Electronics Trading (DMCC) ← Your company
• ABC Electronics Retail (mainland Dubai) ← Sister company
• Both owned by Al Hashimi Holding Company

Transaction:

• ABC Trading sells electronics to ABC Retail
• Annual sales: AED 12M
• Payment terms: 60 days
• Year-end receivable: AED 2.1M

Required Disclosure:

Note X: Related Party Transactions

ABC Electronics Retail LLC is a fellow subsidiary under common control of Al Hashimi Holding Company.

During the year, the Company sold goods to ABC Electronics Retail totaling AED 12,000,000 (2023: AED 9,500,000). As of December 31, 2024, the Company had accounts receivable from ABC Electronics Retail of AED 2,100,000 (2023: AED 1,800,000). These transactions were conducted on commercial terms similar to those with third-party customers. Payment terms are 60 days from invoice date.

Auditor Testing:

• Compare pricing to third-party sales (arm's length test)
• Review invoices and proof of delivery
• Confirm balance with ABC Retail
• Test subsequent collection in 2025

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Example 2: Shareholder Loan

Structure:

• Logistics Services LLC (JAFZA)
• Shareholder: Mr. Abdullah Al Mazrui (100% owner)

Transaction:

• Company borrowed AED 5M from Mr. Al Mazrui in 2022
• Interest rate: 0% (interest-free loan)
• No formal repayment schedule
• Loan still outstanding at year-end

Required Disclosure:

Note X: Related Party Transactions

Mr. Abdullah Al Mazrui is the sole shareholder of the Company.

In 2022, the Company received an interest-free loan of AED 5,000,000 from Mr. Al Mazrui. The loan is unsecured and has no fixed repayment schedule. As of December 31, 2024, the full amount of AED 5,000,000 remains outstanding. No interest was charged during the year.

Auditor Concerns:

• ⚠️ Interest-free loan may not be arm's length (commercial loans would charge interest)
• ⚠️ UAE Corporate Tax: FTA may impute interest for transfer pricing (deemed interest income to shareholder)
• ⚠️ No formal agreement (documentation risk)

Transfer Pricing Implication:

• Market interest rate in UAE: ~6-8% for similar loans
• Implied interest on AED 5M: AED 300K-400K per year
• FTA may adjust taxable income if no commercial justification

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Example 3: Management Fees to Related Party

Structure:

• Manufacturing Company FZE (DAFZA)
• CFO: Ms. Sara Al Hosani
• Sara also owns: Financial Advisory Services LLC (DIFC)

Transaction:

• Manufacturing Company pays Financial Advisory Services AED 180,000 for "management consulting services"
• Sara is both CFO of Manufacturing Company AND owner of Financial Advisory Services
• Services include: monthly financial reporting, budgeting, advisory

Required Disclosure:

Note X: Related Party Transactions

Financial Advisory Services LLC is controlled by Ms. Sara Al Hosani, who is the Chief Financial Officer of the Company.

During the year, the Company paid management consulting fees of AED 180,000 (2023: AED 150,000) to Financial Advisory Services LLC. Services included financial reporting, budgeting, and strategic advisory. Payment terms were 30 days.

Auditor Red Flags:

⚠️ Potential Issues:

1. Conflict of interest: Sara benefits personally from payments made by company where she's CFO
2. Arm's length question: Would company pay AED 180K to unrelated consultant for same services?
3. Double compensation: Sara gets CFO salary PLUS consulting fees from her own company
4. Approval: Was transaction approved by independent board members/shareholders?

Best Practice:

• Board/shareholder approval documented
• Clear scope of work for consulting services (different from CFO duties)
• Competitive pricing (obtain quotes from third parties for comparison)
• Formal service agreement

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Example 4: Shared Services (Common in UAE Groups)

Structure:

• Parent: Holding Company (DIFC)
• Subsidiary 1: Trading Company (DMCC) ← Your company
• Subsidiary 2: Services Company (mainland)
• Subsidiary 3: Logistics Company (JAFZA)

Transaction:

• Holding Company provides shared services to all subsidiaries:
  • HR services
  • IT infrastructure
  • Finance function
  • Office space
• Charges: AED 500K annually to each subsidiary (total AED 1.5M to Holding)

Required Disclosure (for Trading Company):

Note X: Related Party Transactions

Holding Company DIFC is the parent company of the entity.

The Company participates in a shared services arrangement whereby the parent company provides centralized HR, IT, finance, and office space. During the year, the Company paid AED 500,000 (2023: AED 480,000) for these shared services. Costs are allocated based on headcount and usage. As of December 31, 2024, AED 42,000 was payable to the parent for December shared services.

Auditor Testing:

• Verify allocation basis is reasonable (headcount, usage, etc.)
• Compare to cost of obtaining services independently
• Ensure all subsidiaries charged consistently
• Check for profit margin (parent should charge at cost or modest markup)

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How Auditors Identify Related Parties

Step 1: Understanding the Entity

Auditor Procedures at Planning Stage:

Document Review:

• Trade license and Memorandum of Association
• Shareholder register
• Beneficial ownership declaration (UBO)
• Organizational chart
• Board minutes from past year
• Management agreements
• List of directors and key personnel

Inquiries:

• "Who are the shareholders?"
• "Do any shareholders/directors own other companies?"
• "Are there any family relationships among management?"
• "Do you transact with any companies owned by shareholders/directors/family?"

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Step 2: Identifying Transactions

Auditor Testing Procedures:

1. Bank Statement Review:

• Review ALL bank transactions
• Flag payments to individuals (potential shareholder loans)
• Flag payments to companies with similar names
• Investigate large/unusual payments

Example:

• Bank shows AED 800K payment to "Al Mansoori Trading LLC"
• Shareholder's name is "Ahmed Al Mansoori"
• Auditor investigates: Is Al Mansoori Trading related?

2. Accounts Payable Analysis:

• Review vendor master file
• Match vendor names against shareholder/director names
• Check for shared addresses with company
• Analyze vendor payment terms (related parties often have longer terms)

3. Accounts Receivable Analysis:

• Review customer master file
• Extended credit terms may indicate related party
• Sales to companies with similar names

4. Loan Register Review:

• All loans payable/receivable
• Identify lender/borrower
• Check interest rates (below-market = potential related party)

5. Expense Analysis:

• Management fees (often to related parties)
• Consulting fees (potential related party services)
• Rent (company may rent from shareholder's property)

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Step 3: Testing Completeness

Auditor Procedures to Find UNDISCLOSED Related Parties:

Written Management Representation:

• Auditor asks management to sign letter stating:
  • "We have disclosed all related parties and transactions"
  • If later proven false → potential fraud

Third-Party Confirmations:

• Bank confirmations may reveal guarantees by related parties
• Customer/supplier confirmations may indicate relationships

Public Records Search:

• Company registry searches (DED, free zones)
• Cross-reference director/shareholder names

Board Minutes:

• Review for related party transaction approvals
• Check for conflict of interest declarations

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Arm's Length Testing: Verifying Commercial Terms

What is "Arm's Length"?

Arm's Length = Terms that independent parties would agree to in an open market transaction

NOT Arm's Length:

• Interest-free loan from shareholder (market would charge interest)
• Sales to sister company at 50% discount (market wouldn't discount)
• Rent to related party at AED 50/sqft when market is AED 200/sqft

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How Auditors Test Arm's Length

Method 1: Comparable Uncontrolled Price (CUP)

Compare RPT pricing to similar third-party transactions:

Example:

• Company sells to related party at AED 100/unit
• Company sells to third-party customers at AED 95-105/unit
• Conclusion: Arm's length (within range)

Example 2:

• Company rents warehouse from shareholder at AED 50/sqft
• Market rent for similar warehouse: AED 180-220/sqft
• Conclusion: NOT arm's length (73% below market)

Method 2: Cost Plus

For services, compare markup:

Example:

• Parent provides IT services
• Actual cost to parent: AED 400K
• Charges subsidiary: AED 500K (25% markup)
• Analysis: 25% markup reasonable for service provision

Method 3: External Benchmarking

Obtain independent quotes or market data:

Example:

• Company pays related party AED 180K for consulting
• Obtains quotes from 3 independent consultants: AED 120K-150K
• Conclusion: Related party fee 20-50% higher than market

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UAE Corporate Tax & Transfer Pricing Implications

Transfer Pricing Documentation Requirements

FTA Transfer Pricing Rules (Effective 2023):

Documentation Required for RPTs ≥ AED 200,000:

Local File:

• Description of related party transaction
• Functional analysis (who does what, risks, assets)
• Comparability analysis
• Transfer pricing method used
• Financial data supporting pricing

Master File (if group revenue > AED 3.15 billion):

• Group structure
• Business description
• Intangibles
• Intercompany financial activities
• Financial and tax positions

Deadline:

• Prepare documentation contemporaneously (during transaction year)
• Provide to FTA within 30 days if requested during tax audit

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Penalties for Non-Arm's Length Pricing

If FTA determines pricing not arm's length:

Tax Adjustment:

• FTA recalculates income using arm's length price
• Additional tax assessed at 9%

Penalties:

• 50% of additional tax (for failure to maintain documentation)
• Plus interest on late payment

Example:

Your RPT:

• Sold goods to sister company for AED 5M
• Arm's length price per FTA: AED 8M (60% markup, not 20%)
• Income adjustment: AED 3M additional income
• Additional tax: AED 3M × 9% = AED 270,000
• Penalty: AED 135,000 (50% of AED 270K)
• Total cost: AED 405,000

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Common Audit Findings & How to Avoid Them

Top 5 Related Party Audit Issues

Finding #1: Undisclosed Related Parties (38% of RPT issues)

Example:

• Director's wife owns consultancy company
• Company paid consultancy AED 120K
• Not disclosed in financial statements

Why It Happens:

• Management doesn't realize wife's company counts as related party
• Consultancy has different name (doesn't obviously connect to director)

How to Avoid:

• Annual questionnaire to all directors/KMP: "Do you or family members own any companies?"
• Cross-reference all vendors against director/shareholder/family names

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Finding #2: Incomplete Disclosure (31% of RPT issues)

Example:

• Disclosed: "Loan from shareholder: AED 2M"
• Missing: Interest rate, repayment terms, security

IAS 24 Requires:

• Nature of relationship
• Amount
• Terms (interest, repayment schedule, security)
• Outstanding balance

How to Avoid:

• Use IAS 24 disclosure checklist
• Include ALL required elements for each RPT

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Finding #3: Non-Arm's Length Pricing Without Documentation (24% of RPT issues)

Example:

• Purchased goods from parent at AED 500/unit
• Market price: AED 350/unit
• No justification for premium pricing

Auditor Concern:

• Potential profit shifting (UAE Corporate Tax issue)
• Shareholders extracting excess profit

How to Avoid:

• Document rationale for pricing (better quality, faster delivery, exclusive supplier, etc.)
• Obtain transfer pricing study for significant RPTs (> AED 200K)
• Maintain evidence of market pricing for comparison

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Finding #4: Interest-Free Loans (19% of RPT issues)

Example:

• AED 8M loan from shareholder
• 0% interest
• No repayment schedule

Issues:

• Not arm's length (market would charge interest)
• FTA may impute interest (deemed income to shareholder)
• No documentation (risk if shareholder disputes later)

Best Practice:

• Charge market interest rate (even if low, e.g., 3-5%)
• Formal loan agreement with repayment schedule
• Document approval by independent board members (if applicable)

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Finding #5: Missing KMP Compensation Disclosure (15% of RPT issues)

Example:

• Financial statements silent on director/KMP compensation
• IAS 24 always requires this disclosure

Common Excuse:

• "We don't want to disclose salaries publicly"

Reality:

• Disclosure is mandatory (can show total, not individual breakdown)
• Failure = IAS 24 non-compliance = qualified audit opinion

How to Avoid:

• Always include KMP compensation note
• Aggregate amount OK (don't need individual director salaries)
• Include in short-term benefits category

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Frequently Asked Questions

1. My auditor says I must disclose a AED 50,000 payment to my sister company. The transaction is tiny (< 1% of revenue). Why does this matter?

IAS 24 requires disclosure of ALL material related party transactions, and "material" for RPTs is different from overall financial statement materiality.

Key Principle:

Related party transactions have QUALITATIVE materiality:

• Users need to know about transactions with related parties
• Even if amount is small, the nature of the relationship is important
• AED 50,000 may be immaterial to financial statements overall
• BUT disclosure is still required because it's a related party

Specific Rules:

IAS 24 doesn't provide a specific threshold. Generally:

• Disclose if > 5-10% of transaction category (e.g., 10% of total purchases)
• OR > 1% of revenue/assets (whichever is more conservative)
• OR qualitatively significant (e.g., provides critical service)

Your AED 50,000 Example:

Scenario A: Small Company (AED 2M revenue)

• AED 50K = 2.5% of revenue → Likely requires disclosure

Scenario B: Large Company (AED 100M revenue)

• AED 50K = 0.05% of revenue → May not require disclosure (if genuinely immaterial)

However:

• If AED 50K represents a category (e.g., all consulting fees), disclose
• If it's the only transaction with this related party, may disclose anyway for completeness
• When in doubt, disclose (over-disclosure safer than under-disclosure)

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2. Can I avoid related party disclosure by having the related party bill through a third-party intermediary?

No. This is potentially fraud and will be detected during audit.

Attempted Structure (Won't Work):

Improper Scheme:

1. Your company needs services from sister company
2. Sister company bills third party
3. Third party marks up and bills your company
4. You claim "transaction with independent third party" (no RPT disclosure)

Why This Fails:

Auditor Will Detect:

• Review third-party agreement (what services did they actually provide?)
• Trace cash flows (money ultimately goes to related party)
• Analyze pricing (unreasonable markup by third party)
• Substance over form (economic reality is RPT)

Consequences:

• Qualified audit opinion (material misstatement)
• Potential fraud investigation
• UAE Corporate Tax penalties (transfer pricing abuse)
• Criminal liability (depending on intent and materiality)

Proper Approach:

• Direct transaction with related party
• Full disclosure per IAS 24
• Document arm's length pricing
• Obtain independent approvals

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3. Our group has 15 sister companies. Do I need to disclose every transaction with each one separately?

You can aggregate disclosures by category, but must identify each related party.

IAS 24 Allows Aggregation:

By Transaction Type:

• Sales of goods to fellow subsidiaries: AED X
• Purchases from fellow subsidiaries: AED Y
• Management fees paid to parent: AED Z

Example Disclosure:

Note X: Related Party Transactions

The Company is a wholly-owned subsidiary of ABC Holdings (DIFC). Fellow subsidiaries include:

• ABC Trading LLC (DMCC)
• ABC Services LLC (Dubai mainland)
• ABC Logistics FZE (JAFZA)
• [... list all 15]

Transactions with related parties during the year:

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Outstanding balances at year-end:

• Receivables from fellow subsidiaries: AED 2,100,000
• Payables to fellow subsidiaries: AED 1,350,000
• Payable to parent: AED 38,000

All transactions were conducted on commercial terms comparable to those with third parties. Payment terms are 30-60 days.

You Must Still:

• List all related party entities by name
• Describe nature of relationship
• Provide balances

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Conclusion

Related party transactions are among the most scrutinized areas in UAE audits, appearing in 38% of management letters and frequently flagged by UAE Corporate Tax authorities during transfer pricing reviews. Understanding IAS 24's broad definition of related parties (7 categories including shareholders, directors, family members, and controlled entities), the extensive disclosure requirements (relationship, amounts, terms, balances, arm's length status), and the transfer pricing implications ensures your financial statements are compliant, your audit is smooth, and you avoid FTA penalties for non-arm's length pricing.

Your Related Party Transaction Compliance Framework:

Identify ALL related parties (shareholders, directors, family, controlled entities) Track ALL transactions with related parties throughout the year Document arm's length pricing (comparables, market data, transfer pricing studies) Obtain approvals for significant RPTs (board minutes, shareholder resolutions) Prepare comprehensive disclosures (relationship, amounts, terms, balances) Maintain transfer pricing documentation for RPTs ≥ AED 200K (FTA requirement) Charge market interest on related party loans (avoid imputed interest issues) Disclose KMP compensation (always required regardless of amount)

At Farahat & Co, our 37 years of UAE audit experience means:

• Deep familiarity with UAE ownership structures (family businesses, group companies)
• Efficient RPT identification (we know where to look)
• Practical arm's length testing (appropriate comparables for UAE market)
• Transfer pricing expertise (integrated tax and audit approach)
• Complete IAS 24 disclosure preparation (no missing elements)
• Proactive communication (we identify potential issues early)

Related party transaction questions or concerns? Contact our audit team for a consultation. We'll help you identify all related parties, document arm's length pricing, prepare compliant disclosures, and ensure your audit goes smoothly.