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UAE: Understand the Corporate Income Tax for Partnerships7 min read

Author: Uwe Hohmann
Managing Partner, MBA Tax Law / Commercial- & Tax Consultant

The Federal Tax Authority (FTA) has recently published a detailed guide on Corporate Income Tax (CIT) concerning partnerships. This document is intended to clarify and offer more detail on various critical aspects regarding how partnerships are taxed and what they need to do to comply with tax laws.

Main Points from the Guide

The guide provides a comprehensive look at several areas:

Understanding Different Partnerships: It explains the distinct kinds of partnerships, highlighting their main characteristics, which ones are considered taxable entities for CIT, how unincorporated partnerships are dealt with in terms of CIT, and how specific CIT laws apply to partnerships. It also goes into the necessary compliance measures that need to be taken.

Types of Partnerships in Detail: In the UAE, partnerships are either incorporated or not. Incorporated partnerships are recognized as separate legal entities and are taxed accordingly. This includes various forms such as General Partnership, Limited Partnership, and Limited Liability Partnership. On the other hand, unincorporated partnerships, like a group of companies working together or a contractual joint venture, usually have their partners taxed individually. However, these partners can request for the partnership to be treated as a single taxable entity.

Tax Breaks: For unincorporated partnerships that are treated as single taxable entities, it’s important to note they aren’t considered Free Zone Persons and don’t benefit from the 0% CIT rate. Nevertheless, there are tax reliefs like the Participation Exemption for investment income and Small Business Relief for entities making less than AED 3 million. How these reliefs are applied varies depending on whether the partnership or its partners are being taxed.

Deducting Expenses: The rules for expenses that can be deducted from your taxable income are the same for both unincorporated partnerships and the partnerships themselves when they’re treated as single taxable entities. The specific way these deductions work depends on the partnership’s tax status.

Dealing with Foreign Taxes: If an unincorporated partnership pays tax in another country, it might get a tax credit in the UAE. This depends on whether the partnership is taxed as a single entity or if the tax burden is shared among the partners.

Foreign Partnerships: A foreign partnership could be considered an unincorporated partnership based on several factors, like if it isn’t taxed in its home country and its partners are taxed individually. If certain conditions aren’t met, then the foreign partnership might be taxed in the UAE as if it were a business established there.

Transfer Pricing: When it comes to transactions between related parties, including those in unincorporated partnerships, they must meet the standard market rates.

CIT Compliance Needs: Partnerships and their partners have specific duties when it comes to CIT. For instance, even if a partnership isn’t directly taxed, it still needs to register for CIT. Unincorporated partnerships opting to be taxed and those already seen as taxable entities must keep proper financial records and, if making more than AED 50 million, get their financial statements audited.

Rules Against Tax Avoidance: The FTA can make adjustments to transactions that seem to be aimed at unfairly reducing CIT. If a partnership is formed or altered to gain a tax benefit, those changes could be corrected, and penalties applied.

This guide from the FTA is a crucial tool for understanding the intricacies of CIT for partnerships, ensuring businesses know how to comply and take advantage of any available tax reliefs.

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