The corporate tax, like all other taxes, may seem overwhelming to understand; this stands especially true as and when we dig deeper into each of the conditions and nature of the business enterprise. If you are curious about corporate tax and need a general view of applying for it, read tax registration in UAE, A comprehensive guide.
The legal framework outlined in the Federal Decree-Law No. 47 of 2022 provides a comprehensive guideline for corporate tax of partnership business in UAE.
The UAE’s corporate tax law recognizes partnerships as legal entities, making them liable for corporate tax registration. This recognition means the income of a partnership (such as profits and returns on investments) is taxable. However, the level of taxation varies based on the partnership’s corporate structure.
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Partnership Business in the UAE : The Outline
It is essential to understand the word “Partnership” in legal terms. Each definition explains the respective UAE corporate tax laws for partnerships.
- Unincorporated Partnerships
- Incorporated Partnerships
- Regional Partnerships
- Foreign Partnerships
Unincorporated Partnerships
Definition: These are partnerships without separate legal identity from their partners. A simple agreement between partners becomes the basis. They are formed without formal registration as a separate legal entity with FTA.
Corporate Tax Impact: Unincorporated partnerships are typically “transparent” for tax purposes. Instead of taxing the partnership, the tax burden falls on individual partners
based on their share of the income. Each partner is taxed individually on their share of the partnership’s income.
Incorporated Partnerships
Definition: By law, Incorporated partnerships are separate entities. These entities include limited liability partnerships and other forms where the partnership has a legal identity.
Corporate Tax Impact: Incorporated partnerships are partnership businesses in the UAE that are treated similarly to corporations for tax purposes. They are subject to 9% corporate tax on their income, and the partnership itself is responsible for filing tax returns and paying any taxes due. The partners are not individually taxed on the income they receive from the partnership.
Regional Partnerships
Definition: These refer to partnership business in the UAE or the broader Middle Eastern region. Regional partnerships could include:
- Collaborations between companies, government agencies, or even individuals from different emirates or regions within the UAE.
- Collaborations between UAE entities and companies or organizations from countries within the same geographical region, such as the Gulf Cooperation Council (GCC) or the broader Middle East.
- Participation in regional economic initiatives like the Arab Common Market and the Belt and Road Initiative. Regional partnerships in this context refer to collaborations between UAE entities and other participants in these initiatives.
Corporate Tax Impact: The specifics of how regional partnerships are taxed depend on whether they are incorporated or unincorporated. A regional alliance’s specific legal and tax implications depend on the nature of the partnership, the parties involved, and the activities undertaken. Complying with UAE corporate tax laws for partnerships is the thumb rule. Partnerships must abide by the relevant tax regulations, including filing tax returns and paying any taxes due.
Foreign Partnerships
Definition: These are partnerships formed under the laws of a country other than the UAE. Partner types can be individuals, foreign companies, or other foreign alliances.
Corporate Tax Impact: The treatment of foreign partnerships under UAE corporate tax law depends on their tax status in their home country. If the home country does not tax them and the partners are taxed individually on their income shares, they are considered “transparent” for tax purposes in the UAE. The tax liability falls on the individual partners rather than the partnership as a collective entity.
UAE tax laws for Unincorporated Partnerships: The Transparent principle
Under Article 16(1) of the UAE corporate tax law, an unincorporated partnership is not taxable.
In these partnerships, each partner is actively involved in running the business. Activities of Unincorporated alliances include:
- Being part of the business’s daily activities.
- Sharing the goals and plans of the partnership.
- Having a say in the ownership of assets and any agreements made.
Taxing Unincorporated Partnership Business in the UAE:
The following are the key elements to remember about UAE corporate tax laws for partnerships that are unincorporated:
- The partnership itself doesn’t pay taxes. Instead, each partner pays tax on their share of profitsbased on their income tax bracket. The concept is called transparency.
- In an unincorporated partnership business in UAE, the term “transparent” refers to how the tax burden flows directly through to individual partners.
- The Unincorporated partnership filing can be simpler than corporate tax filing.
- According to UAE corporate tax laws for partnerships, Partners can share profits flexibly. They can adjust how much each gets based on their contributions or changing circumstances.
- Unlike in a corporation, partners are personally liable for the partnership’s debts.
- Profits may be taxed twice as part of the partnership’s profits and again on each partner’s tax return.
Division of money and responsibilities in unincorporated partnerships:
- The partners’ link to Assets, debts, income, and expenses is direct. Everything the partnership owns or owes belongs to the individual partners based on their agreed-upon shares.
- Profits and losses are shared based on each partner’s share. So, if the partnership makes money, each partner gets their portion of the profits according to their agreed-upon percentage.
Taxes and deductions for unincorporated partnership business in UAE:
- Partners pay taxes on their share of the profits. Each partner reports their share of the partnership’s income on their tax return and pays taxes on it as if it were their own income.
- Partners can claim certain expenses as deductions. For example- Interest paid on the capital contributions (the money they put into the partnership) and other direct business expenses.
- Foreign taxes paid by the partnership business in UAE can also act as a credit for partners. Hence, it helps reduce their overall tax burden.
Example: If a partnership makes a profit of Dh100,000, and two partners share it 75% and 25%, then Dh75,000 will be taxable for the first partner and Dh25,000 for the second partner, after accounting for any allowable deductions.
Options for unincorporated partnerships:
Partners can choose to register as a taxable entity. They can apply to the Federal Tax Authority (FTA) to have their partnership taxed as if it were a separate company. Though helpful in certain situations, it’s essential to understand the implications before making this decision. If approved, this leads to significant changes:
- The usual rules about individual partners paying tax no longer apply.
- All partners are together responsible for the partnership’s taxes.
- One partner will be in charge of handling tax-related responsibilities
Depending on the specific circumstances of the partnership, The FTA may require some partnerships to register for corporate tax, even if they don’t apply for it.
The Federal Decree-Law No. 47 of 2022 lays down a clear framework for treating corporate tax in the context of unincorporated partnerships. It balances individual responsibilities with collective obligations, providing a structured approach to taxation that caters to the unique nature of partnerships. Understanding these provisions is essential for partners and businesses to ensure compliance and optimal tax management.
Exceptions to UAE corporate tax laws for partnerships:
- • Free zones: Partnership business in UAE operating within designated free zones in the UAE may be exempt from corporate tax for a specific period. However, specific requirements and conditions apply, so careful evaluation is necessary.
- Foreign partnerships: Certain foreign partnerships with limited activity in the UAE may be eligible for tax exemptions or reduced rates. Again, specific criteria and approvals are involved.
Mainland vs. Free Zone Considerations:
- • Tax liability: Partnership business in UAE operating in the mainland are subject to the standard 9% corporate tax rate, while those in designated free zones may enjoy temporary or complete tax exemptions.
- Regulatory environment: Free zones offer simplified regulations and business-friendly policies, but mainland operations provide more comprehensive market access and greater flexibility in specific sectors.
The Federal Decree – Law No. 47 of 2022 provides a structured way for partnership business in UAE without formal incorporation to manage their taxes. It’s all about balancing each partner’s responsibilities with the overall duties of the partnership. Understanding these rules is critical for partners and businesses to manage their taxes correctly and avoid any problems.
Why Nair and Nelliyatt?
FTA makes it SIMPLE for you to apply for tax online. But to understand the nuances of the law to ensure that tax does not become a burden, you can always call us. Our team members are experts in the UAE corporate tax laws for partnerships and will help you meticulously do your paperwork and reduce the tax burden on your partnership.
