Corporate Tax on Unincorporated Partnerships in UAE
The United Arab Emirates (UAE), known for its business-friendly environment and tax advantages, has recently implemented significant changes regarding corporate tax. One notable area of focus is the taxation of unincorporated partnerships. Previously, unincorporated partnerships were not subject to corporate tax in the UAE. However, with recent regulatory developments, the landscape has shifted. This blog will explore the new corporate tax regulations on unincorporated partnerships in the UAE, providing insights into the changing tax landscape for entrepreneurs and investors alike.
Unincorporated Partnership Defined
Unincorporated Partnerships are defined as a relationship established between two or more persons by contract, such as a partnership, trust or any other similar association of persons in accordance with the applicable legislation in the UAE.
The contractual relationship can be a verbal or conduct between the parties may give rise to an Unincorporated Partnership. An unincorporated partnership itself is not considered as taxable person. However, all individual partners who are carrying out businesses as unincorporated partnerships will be treated as taxable person for the purpose of the corporate tax law.
Profit Sharing Ratio
To identify taxable income, the assets, liabilities, income, and expenses of an Unincorporated Partnership must be divided or shared with each partner according to their profit-sharing ratio in Unincorporated Partnership.
Where the profit sharing ratio can’t be identified, the Authority shall prescribe how the assets, liability, income, and loss of the Unincorporated Partnership shall be allocated to each partner. Any foreign tax credit is also shared by every partner in proportion to their profit-sharing ratio in the business.
Interest on Capital
Taxable income of a partner in an Unincorporated Partnership shall include both expenses incurred directly by the partner in conducting the business as well as interest expenditure incurred by the partner in relation to contributions made to the capital account.
The interest paid by an unincorporated partnership to a partner on their capital account is not deductible expenditure to calculate the partner’s taxable income and such interest amount is considered an income allocation to the partner.
Foreign Partnerships
Foreign partnerships are generally treated as unincorporated partnerships for UAE corporate tax purposes, provided they meet specific conditions, including not being subject to tax in the relevant foreign jurisdiction.
Unincorporated Partnerships
When a partner makes an application to the authority to treat them as Unincorporated Partnership as a taxable person, upon approval of the same, the Unincorporated Partnership becomes the taxable person, starting from the commencement of the tax period from the date of application or as may be determined by the Authority.
When this happens, each partner becomes jointly and severally liable for the corporate tax of the Unincorporated Partnership and one partner is required to be appointed as responsible for obligations and proceedings with respect to the corporate tax of the Unincorporated Partnership.
The UAE's corporate tax regulations on unincorporated partnerships have introduced significant changes, where individual partners are now treated as taxable persons, with assets and liabilities allocated based on profit-sharing ratios. Foreign partnerships meeting specific criteria are also subject to these regulations. It is especially crucial for partners to consider the impact on taxable income, including direct expenses and interest payments. When treated as taxable, partners become jointly liable, with one partner designated responsible for tax obligations. These changes emphasize the importance of compliance and adaptation to optimize business operations in the UAE.
If you need any clarification on your unincorporated partnership, Contact us or find out more on our Corporate Tax page
