Treatment of incorporated partnerships versus un-incorporated partnerships under UAE corporate tax laws

A partnership is a collaborative agreement where two or more individuals join forces to conduct business and share the resulting profits and losses. In the UAE, partnerships can be either incorporated or unincorporated, each carrying distinct legal and tax implications.

Incorporated partnerships have a separate legal personality from their partners, meaning they are considered juridical persons for legal and tax purposes. This means that the partnership can enter into contracts, own property, and sue or be sued in its own name. Examples of incorporated partnerships include joint liability companies, limited partnership companies, and civil companies.

For tax purposes, incorporated partnerships are treated similarly to limited liability companies (LLCs), being taxed at the entity level rather than at the individual partner level. Partners in these partnerships typically receive profits that are not subject to corporate tax, as the partnership is considered a resident person in the UAE. The corporate tax law exempts dividends and other profit distributions from resident entities.

On the other hand, unincorporated partnerships do not have a separate legal personality. As they are not considered juridical persons, partners are personally liable for the partnership’s debts and obligations. Partners are jointly and severally liable for corporate tax during their partnership, highlighting the importance of understanding and meeting tax obligations.

Unincorporated partnerships in the UAE are typically not taxed by default, being considered fiscally transparent entities. In such partnerships, partners are individually taxed on their share of profits or gains. However, if partners opt to have their unincorporated partnership treated as a taxable entity, they can apply to the Federal Tax Authority (FTA) for approval. Upon approval, the partnership becomes fiscally opaque and is liable to pay tax on its profits instead of the partners.

For natural persons in an unincorporated partnership, their tax liability depends on the type of business conducted. If the partnership’s activities fall under personal or real estate investment, the income is not subject to corporate tax. However, if the activities are considered other business, the natural person must combine their share of the partnership’s turnover with any other income to see if it exceeds Dh1 million in a calendar year. If it does not exceed this threshold, they are not required to register for corporate tax otherwise they are required to register for corporate tax.

Foreign partnerships are treated as fiscally transparent unincorporated partnerships under UAE corporate tax law if they meet specific criteria. They must not be taxed in their foreign jurisdiction, and each partner must pay tax on their share of income. The partnership must submit an annual declaration to the UAE Federal Tax Authority confirming compliance and have arrangements for tax information sharing between the UAE and the foreign jurisdiction. If these conditions aren’t met, the partnership is considered fiscally opaque and treated like a non-resident taxable person in the UAE if it has a Permanent Establishment or nexus there.

In conclusion, partnerships play a crucial role in the UAE’s business landscape, offering a flexible and collaborative environment for entrepreneurs. Understanding the differences between incorporated and unincorporated partnerships, along with their respective tax implications, is essential for partners to effectively manage their obligations and responsibilities. Whether operating as an incorporated entity or an unincorporated partnership, partners must adhere to UAE tax laws to ensure smooth business operations and mitigate potential liabilities.

The writer is Partner, MICS

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