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How UAE Corporate Tax Regime Apply to Partnerships?

The assets, business, aim, purpose, and structure of an unincorporated partnership should be viewed as belonging to the partners. Applying corporation tax to the Partnership is a common topic of discussion in daily meetings. We've divided the collaboration into local and foreign partnerships to help you comprehend it better.

What is Unincorporated Partnership?

The UAE corporate tax law defines unincorporated partnerships 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," according to the definition given. Based on the description provided above, it is clear that an unincorporated partnership is just a contract between the parties that complies with UAE law but lacks legal existence, but an incorporated partnership does.

Whether UAE Corporate Tax Applicable to Unincorporated Partnerships?

According to Article 16(1) of the UAE Corporate Tax Law, partners who do business as an unincorporated partnership are recognized as taxable individuals rather than the Partnership itself, which is not subject to taxation. These unincorporated partnerships are referred to as "transparent" partnerships since they have no legal identity. The revenue from these partnerships is taxable in the hands of the partners according to their individual income shares.

A person who is a partner in an Unincorporated Partnership shall be treated as:

a) Conducting the Business of the Unincorporated Partnership.

b) Having a status, intention, and purpose of the Unincorporated Partnership.

c) Holding assets that the Unincorporated Partnership holds.

d) Being party to any arrangement to which the Unincorporated Partnership is a party.

The assets, business, aim, purpose, and structure of an unincorporated partnership should be viewed as belonging to the partners. Assets, liabilities, revenue, and expenses of the unincorporated Partnership must be distributed among the partners in proportion to their respective interests or, if each partner's share cannot be ascertained, in the proportion decided by the Federal Tax Authority (FTA). Each partner is entitled to reimbursement for interest costs incurred on capital contributions made by them and for any other costs directly associated with the operation of the Partnership. Interest earned on a partner's capital account will be recognized as income rather than a cost that may be deducted. Each partner will get a foreign tax credit according to their share of the unincorporated Partnership's foreign tax liability.

For instance, X and Y are partners in a partnership that generated a profit of Dh100,000 during a tax year. According to the agreement, X would get 75% of the profit and Y would receive 25%. In light of the adjustment for interest and other costs specifically relevant to the Partnership, Dh75,000 will be taxable in the hands of X, and Dh25,000 will be taxable in the hands of Y.

Read More : How to Prepare Financial Statement Audit Before Corporate Tax Commence in UAE

Unincorporated Partnership to be Treated as Taxable Person Upon Approval of FTA

The FTA must accept any requests from partners for the unincorporated Partnership to be recognized as a taxable person; otherwise, the Partnership will be handled as a legal entity. Each partner must continue to be jointly and severally responsible for the corporation tax due to the FTA upon approval. Any duties and legal actions about the Partnership must be the only partner's responsibility. An unincorporated partnership will become a taxable person as of the start of the tax period for which the application was lodged, as well as any subsequent tax period and any other time frame the FTA may authorize.

Taxable Income of a Partner in Unincorporated Partnership

The Taxable Income of a partner in an Unincorporated Partnership shall take into account the following:

  1. a) Expenditure incurred directly by the partner in the Business of the Unincorporated Partnership.
  2. b) Interest expenditure incurred by the partner concerning contributions made to the capital account of the Unincorporated Partnership.

Interest paid by an Unincorporated Partnership to a partner on their capital account shall be treated as an allocation of income to the partner and is, therefore, not a deductible expenditure for calculating the Taxable Income of a partner in an Unincorporated Partnership.

Foreign Partnership 

Foreign partnerships are regarded similarly in the UAE concerning taxes as they are in the home nation. The UAE tax legislation will also classify international partnerships as "Transparent" if they are not taxable, yet each partner is individually taxed for their portion of the Partnership's profits. However, if the tax is imposed on partnerships in international territory, they will be handled as legal entities.

When each of the criteria mentioned below is satisfied, a foreign partnership will be considered an unincorporated partnership.

  1. The Foreign Partnership is not subject to tax under the laws of the foreign jurisdiction.
  2. Each partner in the Foreign Partnership is individually subject to tax with regard to their distributive share of any income of the Foreign Partnership as and when the income is received by or accrued to the Foreign Partnership.
  3. Any other conditions as may be prescribed by the Minister.

Consult the Best Tax Consultants in Dubai, United Arab Emirates

To determine the Partnership's status and apply the corporation tax correctly to prevent any fines in the future, this is strongly advised. Unincorporated or foreign Partnerships should evaluate the scope, tax rates, timing, and other essential requirements of the upcoming UAE corporate tax. Since the effects on company taxes may be extensive, organizations should begin planning with tax consultants like Farahat & Co. (FAR) in Dubai. In the UAE, we have a team of committed corporate tax consultants that can help you with your company tax filing.

Read More : How to Prepare Accounting and Bookkeeping for Corporate Tax in UAE

Ervee is a CPA with international experience in Tax and Accounting. He has over 12 years of experience in accounting and bookkeeping and over a year in VAT implementation, registration, and accounting in UAE. He regularly drives out inefficiencies in company operations and loves the challenge of helping clients find additional ways for an easier and improved compliance and verification of transactions.