How UAE Corporate Tax Regime Applies to Partnerships
Are you a UAE business owner who recently formed a partnership? Are you curious about how the new corporate tax laws apply to your partnership venture?
The UAE embraced a corporate tax regime in June 2023, reshaping the financial landscape for businesses operating within its borders. While this development has far-reaching implications, it particularly affects partnerships established in the country. This blog explores the intricate interplay between UAE corporate tax law and partnerships, shedding light on how different types of partnerships are taxed and addressing common questions partnership firms might have.
Types of Partnership
Under the UAE corporate tax regime, partnerships are considered to be legal entities and thus liable to register for corporate tax. This indicates that all taxable income generated by the partnership, such as profits from sales or ROIs, is subject to taxation. However, different types of partnerships may be subject to varying levels of taxation depending on their corporate structure.
As per the UAE corporate tax, partnerships are broadly categorized into two forms, which include:
- Foreign Partnerships
- Regional Partnerships
- Incorporated Partnerships
- Unincorporated Partnerships
Unincorporated Partnerships refer to a contractual relationship between two or more persons. These partnerships are treated as ‘transparent’ for UAE CT purposes, i.e., they are not subject to corporate tax because they have no legal identity. Instead, each partner is subject to paying taxes on their share of the income generated through the partnership.
An incorporated partnership is one that’s officially registered as a legal entity with the FTA. This includes limited liability partnerships, partnerships with limited shares, and other similar arrangements where none of the partners are fully responsible for the partnership’s debts or other partners’ deeds. This type of partnership is subject to CT in the same manner as a corporate entity.
A foreign partnership will generally be considered an Unincorporated Partnership under UAE CT Law, subject to meeting certain conditions –
- The partnership is not taxed under the laws of the foreign jurisdiction.
- Each partner in the partnership is individually subject to tax on their share of the partnership’s income.
- Any other conditions as may be prescribed by FTA.
Are Partnerships Taxed Under the UAE CT Regime?
In the UAE, a partnership is taxed under the CT law; however, the tax rate may vary depending on the type of partnership. While incorporated partnerships are taxed at a normal rate, unincorporated partnerships are not subject to CT in the UAE.
Furthermore, all partnerships are required to register with FTA to file their taxes annually. This means that even if an unincorporated partnership is exempt from corporate income tax, it must still file its taxes with the help of a qualified tax consultant.
Tax Treatment of Unincorporated Partnerships
According to UAE CT Law, partners who do business as an unincorporated partnership are recognized as taxable individuals. The taxable Income of these partners is based on their income shares, taking into account:
- Expenses incurred directly by the partner in the partnership
- Interest paid by the partnership to a partner on their capital account.
To calculate the corporate tax paid by individual partners, the assets, liabilities, revenue, and expenses of the unincorporated partnership must be divided among the partners based on their ownership stakes. If the exact ownership share isn’t clear, it should be divided in the proportion decided by the FTA.
For instance, let’s say there’s a partnership with two partners, X and Y, and they made a profit of Dh100,000 during a tax year. According to their agreement, X is entitled to 60% of the profit, and Y would receive 40%. After adjusting the expenses and interests relevant to the partnership, X will be taxed on Dh60,000, and Y will be taxed on Dh40,000.
In conclusion, it is important to ensure that all partnership ventures operating in the UAE register for CT with the relevant tax authority and file their taxes correctly. To ensure compliance with UAE CT regulations, it is wise to seek expert guidance from reputable tax consultants, such as CDA. These tax experts will implement streamlined tax solutions and advice businesses on relevant taxes that need to be paid based on business model or structure. This will help you meet the FTA’s regulations and standards, safeguarding you from hefty fines.
How can AB CAPITAL assist you in tax compliance?
AB CAPITAL SERVICES, with its best team of tax experts, is well equipped with all the dimensions of corporate tax in UAE. Get your firm in UAE with premium tax consultancy services and stay complied with all the regulations under the tax regime. Our team not only provides you with mere consultation but will also enable you to implement strategic tax control processes to maintain a perfect tax structure within your business. To know more about our services, feel free to contact us.