Unincorporated Partnerships in the UAE and Their Tax Treatment7 min read
- Posted by: Omar Sami
- Categories: Accounting, Dubai, Tax
Unincorporated Partnerships in the UAE and Their Tax Treatment
In the landscape of business entities in the United Arab Emirates (UAE), unincorporated partnerships hold a distinct place. These partnerships encompass a wide array of collaborative ventures established through contracts, including traditional partnerships, trusts, and other similar associations of individuals, all in accordance with the UAE’s legal framework. Furthermore, the definition of unincorporated partnerships extends its reach to foreign partnerships that meet certain prescribed conditions, underlining their significance in the UAE’s corporate landscape.
What Defines an Unincorporated Partnership?
One key feature of unincorporated partnerships in the UAE is their intentionally broad definition. Unlike other business entities, they don’t require the formalities of a written partnership agreement or the adoption of specific legal forms. Unincorporated partnerships can arise from a verbal understanding or even through the actions and conduct of involved parties unless the respective commercial law provides otherwise. This flexibility means that various business relationships, whether formally documented or not, can fall under unincorporated partnerships.
An essential criterion for classifying an entity as an unincorporated partnership is the absence of a separate legal personality. In essence, this means that for corporate tax purposes, the business activities of the unincorporated partnership and its owners are treated as one and the same. In contrast, entities with distinct legal personalities, such as limited liability companies formed for specific purposes, such as SPVs or JVs, are considered taxable entities in their own right under the Corporate Tax law.
Tax Treatment of Unincorporated Partnerships
Unincorporated partnerships are treated as fiscally transparent entities for corporate tax purposes in the UAE. This means that, by default, an unincorporated partnership itself is not considered a taxable entity. Instead, each partner within the unincorporated partnership is treated as an individual taxable person. Here’s a closer look at how the tax treatment of unincorporated partnerships operates:
Allocation of Income and Expenditure
Income and expenditure of the unincorporated partnership:
These are allocated to each partner in proportion to their distributive share in the partnership, or as prescribed by the tax authority if the distributive share cannot be identified.
Taxable income of partners:
Partners are taxed individually on their distributive share of income or losses from the unincorporated partnership.
Taxable Income Calculation
Partners can include expenses directly incurred while conducting the business of the unincorporated partnership in their taxable income calculation.
Partners can also include interest expenditure related to contributions made to the capital account of the unincorporated partnership in their taxable income calculation.
However, interest paid by the unincorporated partnership to a partner on their capital account is not deductible for calculating the taxable income of the partner. It is treated as an allocation of income to the partner.
Foreign Tax Credits
Allocation of foreign tax:
Any foreign tax incurred by the unincorporated partnership is allocated as a foreign tax credit to each partner in proportion to their distributive share in the partnership.
Foreign partnerships are treated as unincorporated partnerships for UAE corporate tax purposes if specific conditions are met, including non-taxability in the foreign jurisdiction and individual taxation of partners’ income.
Applying for Taxable Person Status
Application for taxable person status:
Partners in an unincorporated partnership can apply to the tax authority to be treated as taxable persons for corporate tax purposes.
How TME Legal Consultants can support your business
In conclusion, unincorporated partnerships in the UAE offer a flexible and adaptable approach for collaborative business ventures. While initially transparent, their tax treatment allows partners to apply for taxable person status under certain conditions. Understanding these nuances is crucial for businesses and individuals engaging in unincorporated partnerships in the UAE, as it impacts their corporate tax obligations and liabilities.
Despite the treatment of unincorporated partnerships under the CIT Regime, businesses should also be in line with the UAE Commercial Companies Law, which requires establishing a presence for certain business purposes, considering a contractual arrangement not to suffice for commercial purposes.