The new corporate tax (CT) regime in the UAE is applicable from June 1, 2023. The main highlight is that businesses are now taxable for their profits. The standard CT rate is 9%; however, profits of up to AED 375,000 are taxable at a 0% rate. Resultantly, the standard rate only applies when a business has taxable profits of over AED 375,000 in a tax period. Similarly, partnerships are also liable for corporate tax in the UAE. There are rules for partnerships that are set out in the UAE corporate tax law, Federal Decree-Law No. 47 of 2022. In this blog, we are specifically discussing corporate tax for partnerships in the UAE. We will also look at foreign partnerships in this article.
What is a partnership?
A partnership, in simpler terms, is a formal arrangement between two or more parties to manage and operate a business. Each party is known as a partner and is entitled to a share of the profit as per the contributed capital and partnership agreement. There are many types of partnerships; however, the UAE tax law specifically distinguishes between unincorporated partnerships and incorporated partnerships.
Corporate tax for partnerships in the UAE:
There are different forms of partnerships for tax purposes in the UAE. As per Article 16 of the tax law, unincorporated partnerships are generally not taxable for corporate tax in their own right. However, incorporated partnerships are taxable, similar to a corporate business. Let’s discuss different forms of partnerships as per UAE tax law.
Unincorporated partnership:
An unincorporated partnership essentially involves two or more persons forming a contractual relationship rather than existing as a separate legal entity. Some important points as per Article 16 of the tax law are:
1) Unincorporated partnerships are generally not subject to corporate tax as an entity. Instead, each partner is subject to corporate tax on an individual basis. Each partner must register and comply with the requirements of corporate tax law.
2) Assets, liabilities, income, and expenditures are allocated to each partner in the partnership based on the proportion of their share. When a distributive share is not available, the authority may decide the allocation.
3) The taxable income of a partner must take into account the business expenses incurred directly by the partner for the partnership. Furthermore, the taxable income of the partner must also take into account the interest expense in relation to the capital contribution by the partner in the partnership.
4) If the partnership pays interest on capital to the partner, it will be an allocation of income to the partner. Therefore, it shall not be a deductible expense for corporate tax for the partner.
5) If the partnership pays a foreign tax, it will be a foreign tax credit. The partnership must allocate the foreign tax credit to individual partners as per their distributive shares.
6) The partners can apply to the FTA to treat an unincorporated partnership as a taxable person. If the authority approves, the above points are not applicable to individual partners. However, each partner is jointly and severally liable for the corporate tax liability in tax periods when they are a part of the unincorporated partnership. Furthermore, the unincorporated partnership must appoint one partner to be liable for obligations and proceedings with respect to the corporate tax law.
Incorporated partnership:
Incorporated partnerships are formally passed through a legal registration process instead of a contract. These are incorporated just like corporations, and they have limited liability status. This limits the liability of individual partners to their level of investment. They are not liable for their personal assets to meet the business’s financial liabilities. We can have various forms of these partnerships, for instance, limited liability partnerships (LLPs). Incorporated partnerships are liable for corporate tax in the UAE in the same way as corporate entities. Incorporated partnerships enjoy the flexibility of a partnership as well as the liability protection of a corporation.
Foreign partnership:
A foreign partnership is an unincorporated partnership for the purpose of corporate tax if it meets the following conditions: The conditions are:
1) The foreign partnership is not subject to tax as per the foreign jurisdiction’s laws.
2) Each partner of a foreign partnership is subject to taxes as per the distributive share of income upon the receipt or accrual of income by the partnership.
Conclusion:
The new corporate tax regime taxes partnerships depending on their types. Unincorporated partnerships are usually not subject to corporate tax as an entity. However, partners of an unincorporated partnership are subject to corporate tax on an individual basis. On the other hand, an incorporated partnership is subject to corporate tax in the same way as any other corporate business. The UAE law considers foreign partnerships as unincorporated partnerships if they meet certain criteria. Businesses, including partnerships, must adapt to the evolving tax environment in the UAE in order to make successful business decisions.
Creative Zone Tax & Accounting:
For businesses seeking expert guidance in navigating the intricacies of the UAE’s corporate tax landscape, Creative Zone Tax & Accounting stands ready to offer assistance. Our dedicated team of professionals understands the nuances of corporate tax for partnerships. We have years of expertise to ensure your business remains compliant. Contact us today to embark on a journey toward proactive financial management.
