How Does UAE Corporate Tax Regime Apply to Partnerships?

The assets, business, aim, purpose, and structure of an unincorporated partnership are viewed as belonging to the partners themselves, rather than the partnership as an entity. How Corporate Tax applies to a partnership or association is a common topic in daily business discussions. This guide divides the topic into local and foreign partnerships to help clarify how the rules actually apply.

What Is an Unincorporated Partnership?

UAE Corporate Tax law defines an unincorporated partnership as “a relationship established by contract between two or more persons, such as a partnership or trust, or any other similar association of persons, in accordance with the applicable legislation of the State.”

Based on this definition, an unincorporated association is essentially a contract between the parties that complies with UAE law but lacks separate legal existence, unlike an incorporated partnership, which does have that legal status.

Also check: Corporate Tax Services in UAE

UAE Corporate Tax Applicable to Unincorporated Partnerships

Under Article 16(1) of UAE Corporate Tax law, partners conducting business through an unincorporated partnership are treated as the taxable persons, not the partnership itself, which isn’t subject to tax directly. These structures are referred to as “transparent” partnerships since they carry no separate legal identity.

Revenue from these partnerships is taxable in the hands of the individual partners according to their respective income shares. A partner in an unincorporated association is treated as:

• Conducting the business of the unincorporated association
• Holding the status, intention, and purpose of the unincorporated partnership
• Holding the assets that the unincorporated partnership holds
• Being party to any arrangement the unincorporated partnership is party to

Assets, liabilities, revenue, and expenses of the unincorporated association must be distributed among the partners in proportion to their respective interests, or, where each partner’s share can’t be ascertained, in the proportion the Federal Tax Authority (FTA) determines.

Each partner is entitled to reimbursement for interest costs incurred on capital contributions they’ve made, and for other costs directly associated with operating the association. Interest earned on a partner’s capital account is treated as income, not a deductible cost.

Each partner receives a foreign tax credit according to their share of the unincorporated partnership’s foreign tax liability.

Worked Example: Allocating Taxable Profit Between Partners

X and Y are partners in an association generating AED 100,000 in profit during a tax year. Under their agreement, X receives 75% of the profit and Y receives 25%. After adjusting for interest and other costs specifically relevant to the partnership, AED 75,000 is taxable in X’s hands, and AED 25,000 is taxable in Y’s hands, each partner reporting and paying Corporate Tax on their own individual share rather than the partnership filing and paying as a single entity.

Must check: Corporate Tax Registration

Worked Example: Interest on a Partner’s Capital Account

Partner X contributes AED 500,000 in capital to the partnership and, under the partnership agreement, is entitled to 5% annual interest on that capital, AED 25,000. This AED 25,000 is treated as an allocation of income to X, not a deductible business expense for the partnership, and X reports it as taxable income. This is genuinely easy to confuse with the separate reimbursement rule: where a partner personally incurs interest costs on funds borrowed to make their capital contribution, that interest cost can be reimbursed to the partner as a deductible cost. The two scenarios sound similar but are treated oppositely, interest the partnership pays to the partner on their capital balance is taxable income to the partner, while interest the partner themselves incurred to fund their contribution can be a deductible cost.

Unincorporated Partnership Treated as a Taxable Person Upon FTA Approval

The FTA must accept a request from partners for the unincorporated partnership itself to be recognized as a taxable person, otherwise, the association continues to be treated on a transparent, partner-by-partner basis. Once approved, each partner remains jointly and severally responsible for the Corporate Tax due to the FTA, and any duties or legal actions relating to the partnership become the responsibility of a designated partner.

An unincorporated partnership becomes a taxable person from the start of the tax period for which the application was submitted, along with any subsequent tax period, or another timeframe the FTA authorizes.

Taxable Income of a Partner in an Unincorporated Partnership

A partner’s taxable income in an unincorporated association takes into account:

1. Expenditure the partner incurs directly in the business of the unincorporated partnership
2. Interest expenditure the partner incurs relating to contributions made to their capital account in the unincorporated association

Interest paid by an unincorporated partnership to a partner on their capital account is treated as an allocation of income to that partner, and therefore isn’t a deductible expenditure when calculating the partner’s own taxable income.

Foreign Partnerships

Foreign partnerships are generally treated for UAE tax purposes consistent with how they’re treated in their home jurisdiction. UAE tax legislation classifies international partnerships as “transparent” where they aren’t directly taxable, but each partner is individually taxed on their portion of the partnership’s profits.

Where tax is instead imposed directly on the partnership in a foreign jurisdiction, it’s treated as a legal entity for UAE Corporate Tax purposes rather than as transparent.

A foreign partnership is considered an unincorporated partnership where all of the following conditions are satisfied:

1. The foreign association isn’t subject to tax under the laws of the foreign jurisdiction
2. Each partner in the foreign association is individually subject to tax on their distributive share of the foreign partnership’s income, as and when that income is received or accrued
3. Any other conditions the Minister may prescribe

Frequently Asked Questions (FAQs)

How Farahat & Co. Can Help

Farahat & Co., a trusted Tax Firm in UAE, helps unincorporated and foreign partnerships determine their correct Corporate Tax treatment and manage compliant filing on behalf of individual partners.

Contact Farahat & Co. today to discuss your partnership Corporate Tax requirements.