On 4 March 2024, the Federal Tax Authority (FTA) published a Corporate Tax Guide on the “Taxation of Partnerships,” clarifying how the UAE Corporate Tax Law (UAE CT Law) applies to incorporated and unincorporated partnerships and their partners. While the guide is not legally binding, it provides valuable assistance in understanding the tax implications for both types of partnerships.
This blog summarizes the essential characteristics of incorporated and unincorporated partnerships and discusses their specific taxation aspects under the UAE CT Law.
Taxation of Partnerships in the UAE
Incorporated Partnerships
An incorporated partnership is an entity with a separate legal personality established under relevant legislation. These partnerships possess their own rights, obligations, and liabilities. Under the UAE Corporate Tax Law (UAE CT Law), incorporated partnerships are treated as juridical persons. This means they are subject to corporate tax regulations similar to other corporate entities, ensuring they meet compliance and reporting requirements independently of their partners.
Unincorporated Partnerships
Unincorporated partnerships, on the other hand, are arrangements where individuals or entities (including incorporated partnerships) agree to conduct business jointly through written or verbal contracts. These partnerships do not have a separate legal personality but are characterized by the shared intention to distribute profits and losses among the partners. The key aspects of such partnerships include:
– Lack of separate legal personality.
– Agreement (written or verbal) to jointly conduct business.
– Intention to share profits and losses.
In the context of UAE CT Law, unincorporated partnerships must be understood for their unique tax treatment, focusing on the joint business operations and profit-sharing agreements rather than individual partners’ legal statuses. This distinction is crucial for determining tax obligations and ensuring proper compliance for businesses operating as partnerships.
Taxability of Unincorporated Partnerships in the UAE
Unincorporated partnerships in the UAE are typically considered fiscally transparent entities, meaning they are not directly subject to corporate tax. Instead, the tax obligation falls on the individual partners based on their share of the profits or gains. Here are the key points regarding the taxability of unincorporated partnerships:
– Fiscally Transparent: By default, unincorporated partnerships are not taxable entities. The partners are responsible for paying taxes on their distributive shares of the partnership’s income.
– Partner Taxation: The individual partners are taxed on their respective shares of the profits or gains, ensuring that tax liability is managed at the partner level rather than at the entity level.
– Option for Fiscal Opacity: Partners can apply to the Federal Tax Authority (FTA) to treat the partnership as a taxable entity (fiscally opaque). This option, which requires FTA approval, involves:
– The partnership itself being liable for corporate tax on its profits.
– The individual partners not being taxed on their share of the partnership’s profits, as the tax is levied on the partnership itself.
This approach offers flexibility for unincorporated partnerships in the UAE, allowing them to choose the most beneficial tax treatment. By understanding and utilizing these options, businesses can optimize their tax strategy and ensure compliance with UAE tax regulations
Tax Implications for Partners in Unincorporated Partnerships
Partners in a fiscally transparent partnership must evaluate their corporate tax obligations under the UAE Corporate Tax Law in conjunction with Cabinet Decision 49 of 2023. This assessment involves determining whether their business activities constitute personal or real estate investments and if their revenue surpasses AED 1 million.
For natural persons, taxation on Personal Investment Income may not apply, but partners should still consider their tax position carefully.
Additionally, partners are considered to be conducting the business of the unincorporated partnership, making them jointly and severally liable for any Corporate Tax due during their partnership tenure. Understanding these tax responsibilities is crucial for partners to ensure compliance and mitigate potential liabilities.
Tax Relief Considerations
For unincorporated partnerships categorized as “fiscally opaque” Taxable Persons, they are not recognized as Free Zone Persons, thus ineligible for the 0% Corporate Tax regime. This also extends to branches of unincorporated partnerships within Free Zones.
Participation Exemption (PEX) criteria apply to both “fiscally opaque” and “fiscally transparent” partnerships, whether incorporated or unincorporated. In “fiscally transparent” unincorporated partnerships, PEX evaluation occurs at the partner level, including natural persons. Conversely, in “fiscally opaque” partnerships, PEX assessment takes place at the partnership level.
Small Business Relief offers exemptions to eligible Resident Persons with revenues below AED 3 million from Corporate Tax. In “fiscally transparent” partnerships, eligibility is appraised individually for each partner. However, in “fiscally opaque” partnerships, eligibility is ascertained at the partnership level.
Deduction Guidelines
The standard Corporate Tax (CT) regulations concerning deductible expenses are uniformly applicable to both partners and “fiscally opaque” partnerships. In “fiscally transparent” partnerships, partners must factor their respective portion of expenses into their taxable income.
For “fiscally transparent” partnerships, the Interest Deduction Limitation Rule pertains to individual partners, encompassing juridical persons but excluding natural persons. Conversely, “fiscally opaque” partnerships are subject to this rule directly, contingent upon the partnership’s EBITDA.
Foreign Taxation
In instances where an unincorporated partnership has incurred foreign taxes, a credit may be applicable against Corporate Tax (CT) liabilities, provided it is recognized as a Taxable Person, contingent upon specific conditions. In cases where the partnership operates under a “fiscally transparent” structure, the Foreign Tax Credit is distributed among partners based on their proportional stake in the partnership.
Foreign Partnership Classification
A foreign partnership may be classified as “fiscally transparent” under certain conditions:
(a) Tax Status: Not taxed under the jurisdiction of establishment.
(b) Individual Taxation: Each partner taxed on their share of partnership income.
(c) FTA Declaration: Annual submission confirming tax status and individual taxation.
(d) Tax Information Exchange: Established arrangements for tax data exchange with the UAE.
If these criteria are unmet, the partnership may be considered “fiscally opaque” for UAE Corporate Tax. Such partnerships could face UAE taxation akin to Non-Resident Taxable Persons if they possess a Permanent Establishment (PE) or nexus in the UAE.
Income derived from investments in “fiscally opaque” foreign partnerships may qualify for Participation Exemption (PEX) if all relevant conditions are satisfied.
Transfer Pricing Guidelines
Transactions involving related parties, which encompass partners in unincorporated partnerships and their related parties, are subject to stringent arm’s length standards
Corporate Tax Compliance Obligations
1. Fiscally Transparent Partnerships:
– Partners individually determine CT obligations.
– Mandatory CT registration for partnerships.
– CT registration doesn’t imply partnership taxation.
2. Unincorporated Partnerships:
– Maintain financial records.
– Obtain audited statements if revenue surpasses AED 50 million.
– Fiscally opaque partnerships file CT returns within 9 months post-tax year end.
How Unicorn Global Solutions can Help
Unicorn Global Solutions offers expert assistance with partnership taxation in the UAE, ensuring compliance with corporate tax laws. Our services include partnership tax planning, Corporate tax registration, and ongoing tax management.
We help navigate complex tax regulations, optimize tax structures, and maximize tax efficiency for your partnership. Trust Unicorn Global Solutions for tailored tax solutions and comprehensive support throughout your partnership journey. Text us on WhatsApp or call us today to get started.
