Taxation of Partnerships under Corporate Tax in the UAE

A partnership is essentially an arrangement or contract between two or more persons to carry on business together, sharing the profits and losses of that business. Partnerships can be either incorporated, having a separate legal personality distinct from its partners, or unincorporated, which are not treated as separate legal entities. The treatment of an unincorporated partnership is determined by relevant UAE legislation, including federal, emirate, and free zone regulations. 

Examples of entities considered as incorporated partnerships include Joint Liability Company (JLC), Limited Partnership Company (LPC) under the Commercial Companies Law, Civil Company, General Partnership under General Partnership - DIFC Law, Limited Liability Partnership (LLP) under LLP DIFC Law, and Limited Partnership under Limited Partnership Law – DIFC. These entities have a separate legal personality and are taxed at the partnership level, with partners receiving shares in profits exempt from corporate tax. 

Incorporated partnerships are taxed on the business conducted by the partnership itself, rather than directly taxing the partners. Partners typically receive a share in profits that is not subject to corporate tax, as the partnership is treated as a Resident Person in the UAE. The Corporate Tax Law exempts dividends and other profit distributions from a juridical person that is a Resident Person. 

The Corporate Tax Law defines an unincorporated partnership as a contractual relationship between two or more persons to carry on a business or project, sharing its profits and losses. This can include partnerships, trusts, joint ventures, consortiums, or associations of persons. The contractual relationship can be verbal or written, indicating that the business of the unincorporated partnership and its owners are legally considered the same. 

Indicators of an unincorporated partnership include: 

• A contract (written or verbal) entered into by all concerned persons. 

• The intention to share profits and losses of the business. 

• Joint conduct of business activities by partners. 

• Absence of a separate legal personality distinct from its partners. 

A Foreign Partnership is a relationship established by contract between two or more Persons, such as a partnership or trust or any other similar association of Persons, in accordance with the laws of a foreign jurisdiction. 

Conditions to be treated as an Unincorporated Partnership: 

• The Foreign Partnership is not subject to tax under the laws of the foreign jurisdiction where it is established. 

• Each partner in the Foreign Partnership is individually subject to tax on their distributive share of any income of the Foreign Partnership as and when the income is received by or accrued to the Foreign Partnership. 

• The Foreign Partnership submits an annual declaration to the FTA to confirm that it has met both the conditions  listed above. 

• There are adequate arrangements for cooperation between the UAE and the foreign jurisdiction under whose applicable laws the Foreign Partnership is established, for the purpose of sharing  

• tax information of the partners in the Foreign Partnership. 

The default position in Corporate Tax Law is that unincorporated partnerships are fiscally transparent, meaning they are not treated as taxable persons and are not subject to corporate tax. Instead, each partner is taxed on their share of the partnership’s income and expenses. Natural persons in such partnerships are subject to corporate tax if their share exceeds certain thresholds and constitutes business activity. 

A juridical person that is a resident is taxed on its distributive share of the partnership’s income. Non-resident juridical persons are taxed if they have a permanent establishment, derive state-sourced income, or have a nexus in the UAE. Mixed partnerships, with both natural and juridical persons, follow similar rules, with partners liable for the partnership’s tax obligations. 

Unincorporated partnerships can apply to the FTA to be treated as taxable persons. If approved, the partnership itself will be subject to corporate tax, with partners jointly and severally liable for the tax. Each taxable person must determine their taxable income based on financial statements prepared according to SME or IFRS for SMEs standards. Partners must prepare audited financial statements if their revenue exceeds AED 50 million. 

Navigating the tax landscape for partnerships in the UAE requires a thorough understanding of the distinctions between incorporated and unincorporated entities. With the right knowledge and strategic planning, partnerships can optimize their tax positions and ensure compliance with UAE regulations. Utilizing services like Kitaab can simplify the complexities of bookkeeping, online bookkeeping, virtual bookkeeping, and cloud-based bookkeeping, making Kitaab the best bookkeeping software for small businesses in the UAE.