An unincorporated partnership is a contractual relationship between two or more persons, such as a partnership, trust, or other related relationship. An unincorporated partnership under the law may be formed without formally written agreement; it can be verbal or even created by the party's conduct. Thus, an unincorporated partnership is not considered an entity under the law, and there is generally an absence of a separate legal personality.
Status of an Unincorporated Partnership under the UAE Corporate Tax Law
The UAE Corporate Tax Law does not consider an unincorporated partnership a taxable person in the UAE. Rather individual partners carrying out businesses as unincorporated partnerships are treated as individual taxable persons for the purpose of taxable income under the UAE Corporate Tax Law.
The law, however, allows any partner to apply to the Authority to treat an unincorporated partnership as a taxable person on terms and conditions prescribed by the law.
Under the UAE Corporate Tax Law, a partner in an unincorporated partnership shall be treated as a taxable person in the following circumstances;
- If the partner is carrying out an unincorporated partnership business
- The partner must have the intention and objective of an unincorporated partnership
- The partner must be a party to any arrangement that the Unincorporated Partnership is a party to
For taxable income, the assets, liabilities, income, and expenses of an unincorporated partnership must be divided or shared with each partner of the Unincorporated Partnership according to their share in the Unincorporated Partnership. Thus, partners are taxed individually on their distributive share of income and losses.
Under the UAE Corporate Tax Law, if the distributive shares of the partners of an Unincorporated Partnership cannot be ascertained, the Authority shall prescribe how the assets, liability, and income of the Unincorporated Partnership shall be allocated to each partner.
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Taxable income of an Unincorporated Partner under the UAE Corporate Tax Law
The UAE Corporate Tax Law considers the partners conducting business as Unincorporated Partnership as the individual taxable persons. Thus, under the law, each partner of an Unincorporated Partnership is a taxable person in the UAE. In calculating the taxable income of a partner in an Unincorporated Partnership, the following are considered under the UAE Corporate Tax Law
- The partner's direct expenses incurred while carrying out the unincorporated partnership business
- Interest expenditures incurred by partners with respect to contributions made to the Unincorporated Partnership's capital account.
The UAE Corporate Tax Law does not consider interests paid by an unincorporated partnership to a partner on their capital account as a deductible expenditure to calculate the partner's taxable income. Such incomes are considered an income allocation to the partner under the Unincorporated Partnership.
Furthermore, any foreign tax incurred by the Unincorporated Partnership must be shared as a foreign tax credit to every partner in proportion to each partner's distributive share in the business when calculating the corporate tax of each partner.
Foreign Partnerships and Unincorporated Partnerships under the UAE Corporate Tax Law
The UAE Corporate Tax Law defines a Foreign Partnership as a relationship which is established by contract between two or more persons in accordance with the laws of a foreign jurisdiction. Such a relationship may take the form of partnership, trust, or any other similar relationship.
To qualify as an Unincorporated Partnership under the UAE Corporate Tax Law, a foreign Partnership must meet the following conditions;
- The foreign partner does not pay tax under the laws of the foreign partner's jurisdiction.
- Each foreign partnership partner separately pays tax with respect to their distributive share of any income of the foreign partnership as and when the income is received by or accrues to the foreign partnership.
Unincorporated Partnership becoming a taxable person under the UAE Corporate Tax Law
As previously discussed, under the UAE Corporate Tax Law, the partners in an unincorporated partnership are treated as taxable persons and not the Unincorporated Partnership. However, a partner in an Unincorporated Partnership may apply to the Authority for the Unincorporated Partnership to be treated as a taxable person. If the application is successful and the Authority gives its approval, the Unincorporated Partnership becomes the taxable person, starting from the commencement of the tax period when the application is made or from the beginning of a future tax or as may be determined by the Authority.
On the Unincorporated Partnership becoming a taxable person, each partner becomes jointly and severally liable for the corporate tax of the Unincorporated Partnership. Furthermore, a party is required to be appointed to assume the responsibility of undertaking the obligations and proceedings with respect to the corporate tax of the Unincorporated Partnership payable under the law.
Consultants Corporate Tax Consults in UAE
To determine the taxability of an Unincorporated Partnership in compliance with the Corporate Tax Law, Taxable Persons are advised to consult Corporate Tax in UAE. Thus, contact us today and our Tax Experts will be glad to guide you.
Explanatory Guide on Federal Decree Law No 47 of 2022 on the Taxation of Corporations and Businesses
Article 16(1) Federal Decree Law No 47 of 2022
Article 16(3) Federal Decree Law No 47 of 2022
Article 16(2) Federal Decree Law No 47 of 2022