Who counts as a Related Person for VAT under Article 37
Whether two parties are Related Persons matters for several VAT rules in the Kingdom, most directly the rule in Article 38 of the Implementing Regulations that may replace the agreed consideration with Fair Market Value. Article 15(2) of the VAT Law provides that the Regulations shall determine, among other things, the terms and conditions required to amend the value of a Supply between Related Persons, and Article 26(5) of the Common VAT Agreement leaves each Member State to determine the conditions and provisions for adjusting the value of the Supply between Related Persons.
The definition in the Agreement
Article 1 of the Agreement defines Related Persons as two or more Persons where one of them has supervisory or directive control over the others in such a way that he has administrative power that enables him to influence the business of the other Persons from a financial, economic or regulatory aspect. The definition includes Persons who are subject to the authority of a third Person that enables him to control their businesses from the financial, economic or regulatory aspect.
This is a test of control and influence. It is not limited to formal ownership.
The specific cases in Article 37
Article 37(1) of the Regulations provides that, in addition to the general principles established by the Agreement, the Article sets out those cases where two or more Persons will be considered Related Persons for the purposes of applying the Agreement and the Law. The cases are:
- Natural persons and their family. Under Article 37(2), a natural Person is a Related Person in relation to any other natural Person who is a spouse or a brother-in-law, or a relative to the fourth degree.
- Employers, employees and partners. Under Article 37(3), an employer, his employee and partners are Related Persons for the purposes of the Law. Partners in a partnership are also Related Persons.
- A natural person and a legal person. Under Article 37(4), they are Related Persons where the natural Person is a partner or a director of the legal Person or a person who directs its strategic decisions, or where the natural Person, alone or together with a Related Person or Persons, owns or controls over fifty percent (50%) of the capital or over fifty percent (50%) of the voting rights or value of the legal Person, directly or indirectly.
- Legal persons under common control. Under Article 37(5), legal Persons are under common control, and therefore Related Persons, if over fifty percent (50%) of the capital, or ownership or control of over fifty percent (50%) or more of the voting rights or value, in both or all of the legal Persons, is held by the same Person or group of Persons, directly or indirectly.
- Trusts. Under Article 37(6), a trustee of a settlement, a settlor and any beneficiary are Related Persons for the purposes of the Law.
Points of interpretation
The Article operates in addition to the Agreement's general definition. A relationship that does not meet any of the specific thresholds in Article 37 may still fall within the Agreement's control-based definition where one Person has the administrative power to influence the other's business.
The ownership and control tests in Paragraphs (4) and (5) count indirect holdings, and Paragraph (4) also aggregates the holdings of the natural Person with those of his own Related Persons. Group structures should therefore be traced through intermediate entities, and family holdings considered together, before concluding that parties are unrelated.
Paragraph (3) treats an employer and his employee as Related Persons. Supplies between a business and its staff should therefore be reviewed with the related-party valuation rule in mind.
Why the classification matters
Once parties are Related Persons, Article 38 of the Regulations, as amended in 2025, may require the value of a Supply between them to be its Fair Market Value where the conditions in that Article are met. Related-person status is also relevant to the aggregation of supplies for registration purposes, which is addressed separately in Article 9(2) of the Regulations.
Instruments relied on: VAT Law, Article 15(2); Common VAT Agreement, Article 1 (definition of Related Persons) and Article 26(5); Implementing Regulations, ninth edition, 26/11/1444H corresponding to 15/6/2023G, unofficial English translation, Article 37 (not amended by ZATCA Board Resolution No. (01-06-24) dated 17/05/1446H, published in the Official Gazette, Umm Al-Qura issue 5082, on 18 April 2025), with reference to Articles 9(2) and 38. The Arabic text prevails.