Partnerships are collaborative ventures involving entities such as companies and individuals engaged in investment management and business activities including joint ventures (JVs), Limited Liability Partnerships (LLPs) and general partnerships like unincorporated partnerships. This article explains the treatment of Unincorporated partnerships under the UAE corporate law.
Joint ventures (JVs) and unincorporated partnerships are general partnerships that lack a separate legal identity distinct from their partners. Consequently, they are not considered juridical persons and are exempt from Corporate Taxation at the partnership level. In the absence of a distinct legal identity, each partner is seen as actively conducting the partnership's business, assuming its intentions, goals, and ownership of partnership assets. Partners are also parties to any contracts entered into by the partnership. Corporate Tax obligations are imposed individually on each partner based on their share of income derived from the partnership.
Taxation of Partners' Income in Unincorporated Partnerships
Partners within Unincorporated Partnerships are subject to taxation as if they were independent business operators. Consequently, their Corporate Tax liability applies only to income generated from Business and Business Activities falling under the purview of Corporate Tax for individuals
Application for Unincorporated Partnership Tax Status:
Partners in Unincorporated Partnerships have the option to request recognition from the Federal Tax Authority (FTA) for their partnership to be treated as a Taxable Person. This process involves a detailed assessment of Corporate Tax liabilities at the partnership level. Once approved, this application results in a shift where the Unincorporated Partnership becomes the primary entity responsible for Business activities. Individual partners are exempt from Corporate Taxation on their share of income derived from the partnership unless they engage in separate, distinct business endeavors. All income generated within the partnership is then subject to Corporate Tax at the partnership level. It's worth noting that this application is typically irrevocable, except under exceptional circumstances with FTA approval.
Impact on Partner's Tax Liability:
When an Unincorporated Partnership is granted the status of a standalone Taxable Person by the FTA, any Taxable Income related to the partnership is excluded from the individual partners' Taxable Income calculations. Additionally, gains or losses resulting from the transfer, sale, or disposal of a partner's interest in the Unincorporated Partnership are excluded, provided that these interests meet the conditions outlined in the participation exemption.
Reporting Changes in Unincorporated Partnerships
This section focuses on the reporting requirements that Unincorporated Partnerships must adhere to, particularly when there are changes in partnership composition, such as the addition or departure of partners. To effectively ensure compliance with regulatory obligations and timely reporting is essential.
What are Reporting Requirements?
On leaving or joining an Unincorporated partnership, partners must notify the Taxation Authority within twenty working days. Complying with these reporting deadlines is essential to meet regulatory requirements.
Resource Allocation within Unincorporated Partnerships
This section delves into how assets, liabilities, income, and expenses are allocated within Unincorporated Partnerships, especially when these partnerships have not pursued Taxable Person status.
Allocation of Profits and Losses
In cases where an Unincorporated Partnership has not opted to become a Taxable Person, the allocation of partnership profits to individual partners depends on the terms specified in the partnership agreement. If there is no agreement in place, the FTA has the authority to determine the method for distributing profits among partners. All partnership expenses, income, assets, and liabilities are distributed with respect of proportion to their respective shares in the partnership.
Tax Calculation for Unincorporated Partnership Partners:
The complexities of calculating taxes for partners in Unincorporated Partnerships that have not chosen to be treated as Taxable Persons. Partners in such partnerships must follow standard tax calculation procedures outlined in Chapter 6.
Computation of Taxable Income
A partner's Taxable Income is calculated based on their share of the partnership's income, expenses, assets, and liabilities. Partners must also consider:
- Expenses directly related to their business activities within the partnership.
- Interest expenses incurred in connection with contributions made to the partnership's capital account (e.g., cash or assets).
- Partners are not allowed to deduct expenses related to personal travel or residential rent, as these expenses are not incurred for business purposes and are therefore not eligible for deduction.
Treatment of Interest Payments within Partnerships: -
Interest payments from the partnership to a partner's capital account are considered income allocations to the partner. Consequently, these allocations are included in the partner's Taxable Income and cannot be deducted when calculating their Taxable Income.
Taxation of Partner's Income within Partnerships:
In this section, we thoroughly examine the tax framework governing various forms of income received by partners, including salaries, drawdowns, or other earnings derived from their share of profits.
- Taxation of Various Income Streams: Income received by a partner in the form of a salary, drawdown, or any other earnings stemming from their share of profits is treated as an income allocation to the partner. As such, these amounts are typically subject to taxation as a distributive share of the partnership's profits.
Taxation of Foreign Partnerships
The taxation principles applied to foreign partnerships and the criteria that determine their treatment as Unincorporated Partnerships for UAE Corporate Tax purposes are explained as given below.
- Individual Taxation of Partners: - Each partner within a foreign partnership is individually responsible for taxation, with their tax liability corresponding to their share of distributive income.
What are the Criteria for Unincorporated Partnership Status?
To qualify as an Unincorporated Partnership for UAE Corporate Tax purposes, foreign partnerships must meet a specific criterion, including:
- Exemption from taxation in their home country or jurisdiction.
- Liability of partners for taxes on their distributive income, depending on their tax residency status and the tax treatment of their income in the partnership's home country.
- For the confirmation of compliance of the given conditions, an annual declaration is required to submit before the FTA (Federal Tax Authority) Existence of effective mechanisms for sharing tax-related information between the foreign country or jurisdiction and the UAE regarding the partners in the foreign partnership.
Seek the Expert Services of Top Tax Consultants in UAE
Upon meeting the specified criteria, the foreign partnership can be classified as an Unincorporated Partnership, and each partner assumes the status of an individual Taxable Person. Alternatively, the foreign partnership may opt to apply to the FTA, requesting taxation at the partnership level, thereby elevating the foreign partnership itself to the esteemed status of a Taxable Person. Thus, for businesses to effectively determine taxability and to ensure compliance with the corporate tax law, it is advisable to seek the expert services of a Corporate Tax advisor in UAE. Therefore, contact us today and we shall be glad to assist you.
Salah is a qualified Tax Consultant with over 5 years of experience gained in distinct intricate tax matters, he has high expertise in conducting tax negotiations and investigations with the Federal Tax Authority and other external Tax Bodies. He is well-versed with reviewing and drafting tax documents, upon tax preparation and filing. Salah has also advised on a plethora of tax matters, he draws much attention to tax filing procedures and to offering professional investigations to underlying tax complexities.