Corporate Tax for Business Partnerships: FTA issues New Guide

In the UAE context, a partnership can be an incorporated partnership or an unincorporated partnership. An incorporated partnership in the UAE has a separate legal personality distinct from its partners whereas an unincorporated partnership does not.

The UAE corporate tax law treats an incorporated partnership as a juridical person and their tax treatment is akin to that of other juridical persons. On the other hand, an unincorporated partnership is considered fiscally transparent and is not treated as a taxable person under the corporate tax law in the UAE.

In this context, it is critical to know the taxation of partnerships under the regime of corporate tax in the UAE. The Federal Tax Authority (FTA) has released a Guide (CTGPTN1) explaining the taxation of partnerships in the UAE. Corporate tax consultants in Dubai can provide you with further insights.

Read ahead to know how partnerships are taxed under the corporate tax regime in the UAE:

Taxation of Incorporated Partnerships

The determination of whether an entity is treated as a juridical person depends on the legislation under which it is incorporated. The relevant legislation in this regard includes the Federal, Emirate and Free Zone legislation and regulations.

Since they are treated as juridical persons, the Corporate Tax treatment of incorporated partnerships is aligned with the tax treatment of other juridical persons such as Limited Liability Companies (LLCs).

The following entities are considered incorporated partnerships and, therefore, treated as juridical persons under the UAE Corporate Tax law:

• Joint Liability Company (Established under the Commercial Companies Law)
• Limited Partnership Company (Established under the Commercial Companies Law)
• Civil Company (Established under Article 92(e) of the Civil Code)
• General Partnership (Established under the General Partnership Law Dubai International Finance Centre (DIFC) Law No. 11 of 2004)
• Limited Liability Partnership (Established under the Limited Liability Partnership Law DIFC Law No. 5 of 2004)
• Limited Partnership (Established under the Limited Partnership Law DIFC Law No. 4 of 2006)

What are Unincorporated Partnerships?

As per the Corporate Tax Law, an unincorporated partnership is defined as a relationship established by contract between two or more Persons, in line with the relevant UAE legislation. The intention of the relation can be to carry on a Business or a project and share its profits and losses, such as a partnership, trust, joint venture, consortium, association of persons, etc.

The contract entered between the partners can be verbal or written. The best corporate tax advisers in Dubai can advise you on the taxation of unincorporated partnerships. The following factors indicate whether an entity or an arrangement is an Unincorporated Partnership:

• A contract (written or verbal) entered into by all the Persons involved
• The intention to share the profits and losses of the Business
• The partners are conducting the Business Activities jointly
• The partnership does not have a separate legal personality, distinct from its partners

Corporate Tax Treatment of Unincorporated Partnerships

The UAE Corporate Tax Law taxes each partner directly on their shares of profits and gains since the unincorporated partnership is not treated as a taxable person. The partners of an unincorporated partnership can apply to the FTA to treat the unincorporated partnership as a taxable person.

Since an unincorporated partnership is treated as fiscally transparent, it is the partners, not the unincorporated partnership, that need to consider their tax position.

Taxation of Natural Persons in Unincorporated Partnerships

If a natural person is a partner in a fiscally transparent Unincorporated Partnership, that person will be subject to Corporate Tax in proportion to their distributive share provided they fall within the scope of Corporate Tax.

To determine whether they fall within the scope of corporate tax in the UAE, the natural persons need to consider the nature of the Business or Business Activity conducted by the Unincorporated Partnership. If the business activity constitutes Personal Investment or Real Estate Investment, the natural person must disregard the income from such activities as it falls outside of the scope of Corporate Tax.

Taxation of Juridical Persons in Unincorporated Partnerships

The partner of an unincorporated partnership can be a juridical person who is also resident. In such case, the resident person will be subject to corporate tax in proportion to its distributive share in the fiscally transparent Unincorporated Partnership together with any other Business it conducts. However, the Corporate Tax liability will depend on factors, including, whether it is eligible to make an election for Small Business Relief.

The partner can also be a non-resident juridical person. In such a case, the non-resident Person will be subject to Corporate Tax if it has a Permanent Establishment in the UAE derives State-Sourced Income or has a nexus in the UAE.

Taxable Income of Unincorporated Partnerships & Partners

Each taxable person in an unincorporated partnership must determine their Taxable Income separately based on adequate, standalone Financial Statements prepared based on International Financial Reporting Standards (IFRS). If the derived revenue of the taxable person does not exceed AED 50 million, the use of IFRS for SMEs (if the Taxable Person derives Revenue does not exceed AED 50 million).

Tax Gian can Help you Comply with Corporate Tax in the UAE

The new FTA Guide provides valuable insights into the taxation of business partnerships in the UAE. However, the advice of corporate tax consultants in Dubai such as Tax Gian is essential to ensure seamless compliance. Tax Gian, a brand of Jitendra Tax Consultants (JTC), is one of the leading providers of Tax Consultancy Services in Dubai, boasting a highly qualified team of tax experts.

TAX GIAN, under the umbrella of Jitendra Chartered Accountants (JCA), has more than 20 years of experience in serving the requirements of businesses in the UAE. Call us today to ensure your entity is complying with the UAE corporate tax regulations.