Understanding Unincorporated Partnerships Under UAE Taxation

What is a Partnership in UAE?

A partnership involves two or more individuals or entities collaborating to conduct business and share profits and losses. In the UAE, partnerships can be either incorporated, possessing a separate legal identity, or unincorporated, lacking such distinction.

Key Differences: Incorporated vs. Unincorporated Partnerships in UAE:

• Incorporated Partnership: Has a separate legal identity from its partners (e.g., Limited Liability Company).
• Unincorporated Partnership: Does not have a separate legal identity; profits and liabilities flow directly to the partners.

Indicators of an Unincorporated Partnership

• An agreement (formal or informal) between partners.
• A mutual understanding to share profits and losses.
• Joint business activities conducted by the partners.
• Absence of a separate legal identity from its partners.

Tax Treatment Under UAE Corporate Tax Law

1. Fiscally Transparent Taxation: By default, unincorporated partnerships are fiscally transparent, meaning the partnership itself isn't taxed. Instead, each partner is taxed individually on their share of the income.
2. Profit Attribution: Partners must report their share of the partnership's taxable income in their individual tax returns and pay tax accordingly.
3. Corporate Tax Registration Requirements:

• Natural Persons: Required to register for Corporate Tax if their total turnover exceeds AED 1 million in a Gregorian calendar year.
• Juridical Persons: Must register for Corporate Tax regardless of turnover.

Option for Unincorporated Partnership to be Treated as a Taxable Person:

Partners can apply to the Federal Tax Authority (FTA) to have their unincorporated partnership treated as a taxable person. If approved, the partnership will be subject to Corporate Tax as a resident entity, filing tax returns and paying tax on its profits. This decision is generally irrevocable, except under exceptional circumstances with FTA approval.

Foreign Partnerships as Unincorporated Partnerships:

A foreign partnership may be treated as an unincorporated partnership in the UAE if:

• It is not subject to a tax similar to Corporate Tax in its home country.
• Each partner is individually taxed on their share of the income.
• An annual declaration is submitted to the FTA confirming compliance with these conditions.

Example: Tax Treatment of an Unincorporated Partnership

Consider Mr. A, a UAE resident, and Company B, a UAE-incorporated entity, forming an unincorporated partnership with profit shares of 15% and 85%, respectively. The partnership earns AED 10 million in a year:

• Partnership Taxation: The unincorporated partnership itself is not taxed, as it is considered fiscally transparent.
• A's Share: Mr. A's distributive share is AED 1.5 million (15% of AED 10 million). Since this amount exceeds AED 1 million, Mr. A is required to register for Corporate Tax purposes and will be subject to Corporate Tax on this income.
• Company B's Share: Company B's distributive share is AED 8.5 million (85% of AED 10 million). As a juridical person, Company B must register for Corporate Tax regardless of turnover and will be subject to Corporate Tax on its share of the partnership's income.

In this scenario, both Mr. A and Company B are individually responsible for reporting and paying Corporate Tax on their respective shares of the partnership's income.

Who Should Consider an Unincorporated Partnership?

This structure may be suitable for:

• Professionals, consultants, and small business owners seeking flexibility and tax efficiency.
• Businesses that do not require a separate legal entity.
• Entrepreneurs looking to share profits and risks without formal incorporation.

However, it's essential to assess liability risks and compliance requirements before choosing this structure.

Conclusion:

Understanding the tax implications of unincorporated partnerships in the UAE is vital for effective tax planning. Consulting with tax professionals can help navigate compliance requirements and maximize tax efficiency.