A transaction between two parties (entity to entity or entity to person) who are already joined by a pre-existing relationship. This include companies having same shareholders, common directors, partners, management etc. For example, sale of goods from Holding company to subsidiary company, sale of goods from associate company to parent company. (Reference: Internet)
Related party transactions are very common in businesses. Sometimes they are voluminous. Since the special relationship is pre-existed there arise a scenario that entities may take unfair advantage over pricing which cannot be measured on par with a normal transaction in open market. Globally, to make this a fair transaction in all aspects various legal provisions would be in place under direct and indirect taxes.
Article 22 – Value of Supplies Between related parties
With respect to Bahrain VAT Law, the value of such transactions shall be calculated based on market value if supplied less than market value and the customer is not entitled for input tax deduction.