Corporate Tax and Unincorporated Partnerships

Since June 2023, the business landscape in the UAE has undergone significant changes with the implementation of the new Corporate Tax law. This regulation introduces distinct codes of conduct tailored for various types of businesses within the state.

Partnership ventures in the Emirates find themselves in a unique tax arena, subject to specific subsets of corporate laws. These partnerships can be broadly categorized as local partnerships and foreign partnerships, each with its own set of considerations.

Local partnerships, further classified as Incorporated and Unincorporated Partnerships, present tax distinctions that warrant closer examination. Unincorporated partnerships, as defined by the Corporate Tax Law in the UAE, involve a contractual relationship between two or more individuals, forming a business venture where the partnership itself is not considered a separate legal entity for taxation purposes. Conversely, incorporated partnerships are subject to taxation both at the partner level and as a distinct legal entity.

Foreign partnerships, under certain criteria, are treated as unincorporated partnerships by default, provided they are not subject to tax in the foreign jurisdiction.

Taxing partners in unincorporated partnerships within the UAE involves a nuanced approach. Depending on the agreed-upon contractual terms, each partner is individually liable for a specified percentage of the profits earned from the venture.

While unincorporated partnerships are fiscally transparent and exempt from tax, partners must adhere to a meticulous taxation process. The partnership itself is required to register with the Federal Tax Authority (FTA) and file an annual tax return, even in the absence of taxable income.

The taxation of partners in unincorporated partnerships hinges on their share of the partnership's income, with each partner responsible for reporting their individual share on their tax return. The allocation of partnership income is typically outlined in the partnership agreement; however, in the absence of such specifications, the Federal Tax Authority may intervene.

Compliance factors for unincorporated partnerships in the UAE include registration with the FTA, annual tax return filing, meticulous record-keeping of income and expenses, adherence to transfer pricing rules for related-party transactions, and retention of tax records for at least seven years.

While unincorporated partnerships offer advantages, especially for nascent businesses, navigating the intricacies of taxation requires careful consideration. Seeking the guidance of a proficient fiscal consultant can streamline the compliance process and provide clarity through the intricate tax landscape. If you find yourself in an unincorporated partnership, ensuring compliance and enlisting the support of a skilled fiscal consultant can facilitate a smoother journey through the complexities of taxation.

Feel free to contact TEAM ALWAHAT today to know more about whether Unincorporated Partnerships face Corporate Tax Liabilities.