Article 36 of the Corporate Tax Law states that payment or benefit provided by a Taxable Person to its Connected Person will be deductible only if and to the extent that the payment or benefit corresponds with the Market Value of the service or benefit provided by the Connected Person.
The definition of Connected Person as per Article 36(2)(b), of the Corporate Tax Law includes a Director or an Officer of the Taxable Person. However, there was ambiguity about who should be considered a connected person, in reference to director or an officer.
Public clarification via CTP010 intends to clarify the terms "Director" and "Officer" for Corporate Tax purposes, which is as outlined below:
| Definition of Director |
Definition of Officer |
| A person who holds a position on the Board of Directors or an equivalent governing body as determined under the applicable law governing the Taxable Person's incorporation, or constitutional documents (MoA, AoA, trust deed, partnership deed, etc.)
|
A natural person who has final or ultimate strategic decision-making or binding authority to:
- Plan, direct, and control the activities of a Taxable Person, in accordance with the International Accounting Standard 24, or
- Make strategic decisions in relation to financial, operational, or commercial matters, or
- To enter or approve legally or contractually binding agreements.
|
Though the definition of Director has been mentioned, it is also provided that inclusion of the term "Director" in a person's job title does not automatically make the individual a 'Connected Person' for purposes of Article 36.
Even if an individual is not a 'Director' as per position held in Board of Directors or equivalent governing body, but if he or she has the final decision-making or binding authority (including any employee who has been granted power of attorney for such strategic functions or seconded or outsourced personnel or any person hired for interim period entrusted with undertaking such functions), then also that person will be considered as "Connected Person".
Additionally, the clarification also specifies certain job titles as a reference to be considered as "Officer" for the purposes of Article 36, and are collectively referred to as "C-suite":
- Chief Executive Officer (CEO)
- General Manager (GM)
- Chief Financial Officer (CFO)
- Chief Operating Officer (COO)
- Chief Commercial Officer (CCO)
- An authorized representative with discretionary authority.
Though the formal appointment letter or job title may serve as an indicator of whether a person is an officer or not, it should not be relied on as a sole criterion.
Accordingly, substance over form will be considered, and individuals who either formally hold a position on the board or an equivalent governing body, or are involved in final decision-making - fall within the scope of "Connected Persons" irrespective of the designation used in employment titles.
While the terms 'Related Party' and 'Connected Person' are defined separately and serve different regulatory purposes, situations may arise where a person simultaneously meets the criteria of both a Related Party and a Connected Person in relation to a Taxable Person. The recent clarification provides clear guidance that person will be treated solely as a Related Party for the purposes of applying the Corporate Tax Law. This means that the provisions applicable to Related Parties, most notably the transfer pricing rules and arm's length principle, will take precedence over those specifically applicable to Connected Persons. The relevant extract has been reproduced below for ease of reference:
"It is also important to note that if a person is considered a Related Party as well as a Connected Person of a Taxable Person, such person will only be considered a Related Party for the purposes of the Corporate Tax Law."
