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.
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
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.
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.
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.
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.
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.
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.
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.
A partner's Taxable Income is calculated based on their share of the partnership's income, expenses, assets, and liabilities. Partners must also consider:
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.
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.
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.
To qualify as an Unincorporated Partnership for UAE Corporate Tax purposes, foreign partnerships must meet a specific criterion, including:
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.
Mostafa is a seasoned Tax Consultant with over 5 years years of experience gained in diverse taxations matters. He has vast expertise in settling tax disputes with the Federal Tax Authority and handling of tax procedures in compliance with tax laws. He is adept in investigating underlying tax intricacies and offering expert tax advisory. He is also well-versed in conducting tax analysis’s and negotiations with the Tax Regulators, upon tax preparation and filing. Mostafa specializes in the areas of Tax law, Auditing, Accounting and Banking law.