Overview

Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (“Corporate Tax Law”) was issued on 3 October 2022 and was published in Issue #737 of the Official Gazette of the United Arab Emirates (“UAE”) on 10 October 2022.

The Corporate Tax Law provides the legislative basis for imposing a federal tax on corporations and Business profits (“Corporate Tax”) in the UAE.

The provisions of the Corporate Tax Law shall apply to Tax Periods commencing on or after 1 June 2023.

Purpose of this guide

This guide is designed to provide general guidance on the taxation of partnerships. The guide provides the following:

• A general understanding of how the Corporate Tax Law treats partnerships.

• Information about how the Corporate Tax Law applies to a partnership and its partners, including special provisions that apply to partnerships and the tax treatment of commonly occurring events, and

• Information regarding the registration, filing requirements, compliance, and other tax obligations related to partnerships and partners.

Who should read this guide?

The guide should be read by Persons that are carrying on a Business in the UAE, with other Persons by way of a partnership arrangement or trust or any other similar association of Persons.

How to use this guide

The relevant articles of the Corporate Tax Law and the implementing decisions are indicated in each section of the guide.

It is recommended that the guide is read in its entirety to provide a complete understanding of the definitions and interactions of the different rules. Further guidance on some of the areas covered in this guide can be found in other topic-specific guides.

In some instances, simple examples are used to illustrate how key elements of the Corporate Tax Law apply to partnerships. The examples in the guide:

• Show how these elements operate in isolation and do not show the interactions with other provisions of the Corporate Tax Law that may occur. They do not, and are not intended to, cover the full facts of the hypothetical scenarios used nor all aspects of the Corporate Tax regime, and should not be relied upon for legal or tax advice purposes; and

• Are only meant for providing the readers with general information on the subject matter of this guide. They are exclusively intended to explain the rules related to the subject matter of this guide and do not relate at all to the tax or legal position of any specific juridical or natural persons.

Legislative references

In this guide, the following legislation will be referred to as follows:

• Federal Law No. 5 of 1985 promulgating the Civil Transactions Law, and its amendments, is referred to as “Civil Code”;

• Federal Decree-Law No. 32 of 2021 on Commercial Companies is referred to as “Commercial Companies Law”;

• Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, and its amendments, is referred to as “Corporate Tax Law”;

• Cabinet Decision No. 116 of 2022 on the annual Taxable Income subject to Corporate Tax is referred to as “Cabinet Decision No. 116 of 2022”;

• Cabinet Decision No. 49 of 2023 on Specifying the Categories of Businesses or Business Activities Conducted by a Resident or Non-Resident Natural Person that are Subject to Corporate Tax is referred to as “Cabinet Decision No. 49 of 2023”;

• Cabinet Decision No. 100 of 2023 on Determining Qualifying Income for the Qualifying Free Zone Person for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as “Cabinet Decision No. 100 of 2023”;

• Ministerial Decision No. 43 of 2023 Concerning Exception from Tax Registration for the Purpose of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as “Ministerial Decision No. 43 of 2023”;

• Ministerial Decision No. 73 of 2023 on Small Business Relief for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as “Ministerial Decision No. 73 of 2023”;

• Ministerial Decision No. 82 of 2023 on the Determination of Categories of Taxable Persons Required to Prepare and Maintain Audited Financial Statements for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as “Ministerial Decision No. 82 of 2023”;

• Ministerial Decision No. 114 of 2023 on the Accounting Standards and Methods for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as “Ministerial Decision No. 114 of 2023”;

• Ministerial Decision No. 127 of 2023 on Unincorporated Partnership, Foreign Partnership, and Family Foundation for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as “Ministerial Decision No. 127 of 2023”;

• Ministerial Decision No. 134 of 2023 on the General Rules for determining Taxable Income for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as “Ministerial Decision No. 134 of 2023”;

• Ministerial Decision No. 265 of 2023 Regarding Qualifying Activities and Excluded Activities for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as “Ministerial Decision No. 265 of 2023”; and

• Federal Tax Authority Decision No. 16 of 2023 on Determining the Requirements for the Registration of the Unincorporated Partnership and Determining the Distributive Shares of Partners in an Unincorporated Partnership for the purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as “FTA Decision No. 16 of 2023”;

Status of this guide

This guidance is not a legally binding document, but is intended to provide assistance in understanding the tax implications for partnerships relating to the Corporate Tax regime in the UAE. The information provided in this guide should not be interpreted as legal or tax advice. It is not meant to be comprehensive and does not provide a definitive answer in every case. It is based on the legislation as it stood when the guide was published. Each Person's own specific circumstances should be considered.

The Corporate Tax Law, the implementing decisions, and the guidance materials referred to in this document will set out the principles and rules that govern the application of Corporate Tax. Nothing in this publication modifies or is intended to modify the requirements of any legislation.

This document is subject to change without notice.

What is a partnership?

A partnership is normally an arrangement, relationship or contract between two or more Persons to carry on Business together, and to share the profits and losses of that Business.

In the UAE context, a partnership may be an incorporated partnership, or an Unincorporated Partnership. The key distinguishing factor between the two is that an incorporated partnership has a separate legal personality distinct from its partners whereas an Unincorporated Partnership does not. Incorporated partnerships are considered juridical persons for the purposes of the Corporate Tax Law. The Corporate Tax Law contains specific provisions for Unincorporated Partnerships, which are considered later in this guide.

Incorporated partnerships

Whether an entity is treated as an incorporated partnership i.e. a juridical person with a separate legal personality depends on the legislation under which it is incorporated, established or set up.

The legal status of an incorporated partnership will be informed by the relevant legislation in the UAE. The relevant legislation includes the Federal, Emirate and Free Zone legislation and regulations.

Based on the relevant legislation, the following is an illustrative list of entities considered as incorporated partnerships and, therefore, treated as juridical persons under the Corporate Tax law.

1. Joint Liability Company: A Joint Liability Company established under the Commercial Companies Law is a company which consists of two or more physical partners that are severally and jointly liable in all their personal assets for the company's obligations. ^[1]

2. Limited Partnership Company: A Limited Partnership Company established under the Commercial Companies Law is a company which consists of one or more joint partners, having the capacity of traders, who are liable, severally and jointly, for the partnership's obligations, and one or more silent partners who are not liable for the partnership's obligations except to the extent of their contribution to the partnership's capital. Silent partners do not have the capacity of a trader. ^[2]

3. Civil Company: As established under Article 92(e) of the Civil Code, a contract, by which two or more persons undertake to contribute jointly to an undertaking of a pecuniary nature by providing a contribution of property or services, with the objective of sharing in the profits or the losses of the undertaking. ^[3] These are known as civil companies or business partnerships in general parlance.

4. General Partnership: A General Partnership established under the General Partnership Law Dubai International Finance Centre (DIFC) Law No. 11 of 2004 is a relationship which exists between two or more persons who agree to carry on any Business with the intention of making a profit. ^[4] Each partner of a General Partnership is jointly and severally liable with the other partners for all debts and obligations of the General Partnership incurred while he is a partner. ^[5]

5. Limited Liability Partnership: A Limited Liability Partnership established under the Limited Liability Partnership Law DIFC Law No. 5 of 2004 is established between two or more persons to conduct any lawful business. ^[6] The members of a Limited Liability Partnership have liability to contribute to its assets in the event of it being wound up. ^[7]

6. Limited Partnership: A Limited Partnership established under the Limited Partnership Law DIFC Law No. 4 of 2006 for any lawful purpose by two or more persons and may consist of any number of persons but includes: (a) one or more persons called General Partners, who are liable for all debts and obligations of the Limited Partnership; and (b) one or more persons called Limited Partners, who make a contribution at the time of entering the partnership (either in money, money's worth or any other property), and are not liable for the debts and obligations of the partnership beyond the amount of their contribution. ^[8]

Note that partnerships listed under (a), (b) and (c) above are incorporated under UAE federal law whereas others are typically found under the laws of Free Zones. The above is not an exhaustive list of incorporated partnership forms.

The above partnerships, under the applicable legislation, have a separate legal identity from their partners. ^[9] That is to say the partnerships themselves have their own rights, obligations and liabilities. Accordingly, the above partnerships are juridical persons under the applicable legislation, as well as for the purposes of the Corporate Tax Law.

On the basis that they are juridical persons, the Corporate Tax treatment of incorporated partnerships is aligned with the tax treatment of other juridical persons such as Limited Liability Companies (LLCs). The partners in these partnerships are not directly taxed on the Business conducted by the partnership, as this is taxed at the level of the incorporated partnership. The partners will generally receive a share in profits that will not be subject to Corporate Tax as the partnership is treated as a Resident Person in the UAE, and the Corporate Tax Law exempts Dividends and other profit distributions from a juridical person that is a Resident Person. ^[10]

Unincorporated Partnerships

The Corporate Tax Law defines an Unincorporated Partnership as a relationship established by contract between two or more Persons, in accordance with the applicable legislation of the UAE. ^[11] This can be to carry on a Business or a project and share its profits and losses, such as a partnership, trust, joint venture, consortium, association of persons, etc. The contract can be verbal or written. The reference to a contractual relationship in the definition of Unincorporated Partnership means that, legally, the Business of the Unincorporated Partnership and its owners is or can be considered the same.

Certain illustrative factors that may indicate that an entity or an arrangement is an Unincorporated Partnership include:

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

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

• The partners are conducting the Business Activities jointly.

• The partnership does not have a separate legal personality, distinct from its partners.

The above factors are merely illustrative and are not conclusive to determine whether an Unincorporated Partnership exists.

The following examples demonstrate some common situations and whether they create an Unincorporated Partnership between the Persons involved:

Overview

As noted above, the Corporate Tax Law defines an Unincorporated Partnership as a relationship established by contract between two Persons or more, such as a partnership or trust or any other similar association of Persons, in accordance with the applicable legislation of the UAE. ^[12]

A Foreign Partnership may also be treated as an Unincorporated Partnership if certain conditions are satisfied (see Section 8 for further details).

An Unincorporated Partnership as defined in the Corporate Tax Law does not necessarily have to adopt a formal written partnership agreement. A verbal agreement can also be sufficient, whereby the parties agree to share Business profits and losses. In addition, an Unincorporated Partnership can take on various forms, including a trust or similar association of persons which is not a juridical person.

As per the Corporate Tax Law, the default position is that an Unincorporated Partnership is not considered a Taxable Person in its own right. Instead, the Corporate Tax Law “looks through” the Unincorporated Partnership and taxes each partner directly on their share of profits or gains. Such a partnership is considered to be “fiscally transparent”.

The partners in an Unincorporated Partnership can make an application to the FTA for the Unincorporated Partnership to be treated as a Taxable Person in its own right. ^[13] An Unincorporated Partnership treated as a Taxable Person is considered to be “fiscally opaque”.

Unincorporated Partnerships, and their treatment for Corporate Tax purposes, are discussed in more detail in the following Sections.

Who can be a partner in an Unincorporated Partnership?

The word “Person” is defined in the Corporate Tax Law as a natural person or a juridical person. ^[14] Hence a partner in a partnership can be an individual or a legal entity.

An Unincorporated Partnership relationship can exist between a number of natural persons, a number of juridical persons or a combination of juridical persons and natural persons. The partners can be incorporated partnerships, residents and non- resident persons, UAE and foreign incorporated companies.

Where a partnership itself is not treated as a distinct legal entity, separate from its partners, the partnership cannot become a partner in another partnership. Only partnerships that have their own separate legal personality can become a partner in another partnership.

Thus, an Unincorporated Partnership cannot become a partner in a partnership as it does not have a separate legal personality (i.e. is not a juridical person), even where the Unincorporated Partnership is treated as a Taxable Person in its own right.

The Corporate Tax Law provides for the concept of a Tax Group. ^[15] This enables a parent company, together with one or more juridical Resident Persons (i.e. its Subsidiaries) to be treated as a single Taxable Person, subject to the satisfaction of certain conditions. Even though the Tax Group is treated as a Taxable Person for the purposes of the Corporate Tax Law, the Tax Group itself is not a Person. It is merely a construct of the Corporate Tax Law. Therefore, a Tax Group cannot be a partner in an Unincorporated Partnership. However, the Parent Company, or the Subsidiaries that are members of the Tax Group, can individually be partners in an Unincorporated Partnership, as they are juridical persons with a separate legal personality.

Key features of an Unincorporated Partnership

Unincorporated Partnership treated as fiscally transparent

The default position in the Corporate Tax Law is that an Unincorporated Partnership is treated as fiscally transparent, meaning that it is not treated as a Taxable Person, and is not subject to Corporate Tax. Instead, each partner is treated as conducting the Business of the Unincorporated Partnership and subject to Corporate Tax on their distributive share of assets, liabilities, income and expenditure in the Unincorporated Partnership.

Therefore, it is the partners, not the fiscally transparent Unincorporated Partnership, that must consider their Corporate Tax position. ^[19]

Unincorporated Partnership treated as fiscally opaque

The partners of an Unincorporated Partnership have the option to make an application to the FTA for the Unincorporated Partnership to be treated as a Taxable Person, i.e. fiscally opaque. ^[30]

If the application is approved by the FTA, the Unincorporated Partnership will be treated as a Taxable Person. It will be subject to Corporate Tax as a Resident Person. As a Taxable Person, it will determine its Taxable Income and pay Corporate Tax on its own profits, instead of the partners.

However, the partners will still be jointly and severally liable for the Corporate Tax Payable by the Unincorporated Partnership for the Tax Periods during which they are partners. ^[31]

Determining Taxable Income for an Unincorporated Partnership and its partners

The partners of an Unincorporated Partnership are the Taxable Persons in respect of the partnership's Business unless an application has been made by the partners to treat the Unincorporated Partnership as a Taxable Person and such application is approved by the FTA.

Irrespective of who is the Taxable Person in a partnership arrangement (i.e. the partners or the partnership itself), each Taxable Person is required to determine their Taxable Income separately based on adequate, standalone Financial Statements prepared based on International Financial Reporting Standards or the International Financial Reporting Standard for SMEs (if the Taxable Person derives Revenue that does not exceed AED 50 million). ^[32]

In addition:

• If partners are treated as Taxable Persons (in the case of a fiscally transparent Unincorporated Partnership), each partner is required to prepare and maintain audited Financial Statements if their individual Revenue exceeds AED 50 million. ^[33]

• If the Unincorporated Partnership is treated as a Taxable Person (in the case of a fiscally opaque Unincorporated Partnership), the partnership is required to prepare and maintain audited Financial Statements if its Revenue exceeds AED 50 million. ^[34]

To determine the Taxable Income of the Taxable Person, the starting point is the Accounting Income (i.e. accounting net profit or loss) for the relevant Tax Period as per the Financial Statements. This is then adjusted according to the general rules prescribed for determining the Taxable Income. ^[35]

In relation to partners in a fiscally transparent Unincorporated Partnership, for practical purposes, the partners will need to determine the joint income and expenditure and resultant net income of the Unincorporated Partnership first, in order to split such income and expenditure and resultant net income in proportion to each partner's distributive share. They will then need to add their share of the partnership net income to their net income from any other Business or Business Activity.

Generally, income arising from the operation of the partnership Business will be included in the income of each partner in accordance with their distributive share in relation to a fiscally transparent Unincorporated Partnership. However, some forms of income and expenditure arising in the context of an Unincorporated Partnership warrant specific consideration as discussed below.

Income received by the Unincorporated Partnership and/or its partners

Deductible expenditure

For the most part, the general Corporate Tax rules on deductible expenditure apply similarly to partners and Unincorporated Partnerships that are treated as Taxable Persons, respectively. Thus, this Section only considers in greater depth the provisions that relate specifically to Unincorporated Partnerships.

Notably, in relation to a fiscally transparent Unincorporated Partnership, the Taxable Income of a partner must take into account their distributive share of expenditure, and any expenditure incurred by the partner directly in conducting the Business of the Unincorporated Partnership. ^[53]

Tax Loss relief and limitation on Tax Loss carry forward

The Corporate Tax Law allows a Taxable Person to reduce its Taxable Income by offsetting part of the Tax Loss accumulated in previous years. However, a Taxable Person cannot claim Tax Loss relief for: ^[85]

• Losses incurred before the date of commencement of Corporate Tax,

• Losses incurred before a Person becomes a Taxable Person, and

• Losses incurred from an asset or activity that generates income which is exempt from Corporate Tax.

A Taxable Person can use a Tax Loss up to an amount of 75% of the Taxable Income (before any Tax Loss relief) for the relevant Tax Period. ^[86] An unutilised Tax Loss can be carried forward and utilised in subsequent Tax Periods indefinitely subject to the fulfilment of one of the following conditions: ^[87]

1. Continuity of ownership: ^[88] At least 50% of the owners of the Taxable Person continue to be the same from the beginning of the Tax Period in which the Tax Loss is incurred to the end of the Tax Period in which such Tax Loss or part thereof is offset against Taxable Income of that period.

2. Continuity of Business: ^[89] Where there has been a change of more than 50% in the ownership (i.e. the above condition (a) is not met) the Tax Loss can still be carried forward if the Taxable Person continues to conduct the same or a similar Business following the change in ownership.

Thus, even if the continuity of ownership test is not satisfied, the Tax Loss can be carried forward if the Taxable Person continues to carry on the same or similar Business.

In the context of an Unincorporated Partnership, the limitation on carry forward of a Tax Loss would only be a relevant consideration if it was fiscally opaque and at least 50% of the ownership in the Unincorporated Partnership, as represented by the partners' distributive shares, did not remain the same.

Further, where a fiscally opaque Unincorporated Partnership has incurred a Tax Loss which is carried forward to subsequent Tax Periods, ^[90] that Tax Loss can only be utilised to offset the Taxable Income of the fiscally opaque Unincorporated Partnership and not the Taxable Income of the partners. If any partner exits the partnership, no portion of the Tax Loss relating to the partnership will be allocated to the exiting partner.

Foreign Tax Credit

If the Unincorporated Partnership has suffered any foreign tax, a credit may be available against the Corporate Tax Payable by the Unincorporated Partnership where it is treated as a Taxable Person, subject to the facts and circumstances. Where it is fiscally transparent, the Foreign Tax Credit is allocated among the partners in accordance with their distributive share in the Unincorporated Partnership. ^[91]

Application and timing of change in status to Taxable Person

The partners of an Unincorporated Partnership can file an application with the FTA for the Unincorporated Partnership to be treated as a Taxable Person in its own right. ^[92] This is in contrast to the default position where the Unincorporated Partnership is treated as fiscally transparent, with the partners being subject to Corporate Tax on their distributive share.

Where the application is approved, the Unincorporated Partnership will be treated as a Taxable Person from: ^[93]

• The beginning of the Tax Period during which the application was filed by the partners,

• The beginning of a future Tax Period, or

• Any other date determined by the FTA.

Other Corporate Tax consequences of being treated as a Taxable Person

Upon the change in the status of an Unincorporated Partnership from fiscally transparent to fiscally opaque due to a successful application, ^[94] any gain or loss on a transfer may be covered under Business Restructuring Relief. ^[95] This is subject to satisfaction of the following conditions: ^[96]

• The transfer is done in accordance with the applicable legislation of the UAE,

• The partners and the partnership are subject to UAE Corporate Tax,

• None of the partners or the partnership itself is an Exempt Person,

• None of the partners or the partnership itself is a Qualifying Free Zone Person,

• The partners and the partnership have the same Financial Year,

• The partners and the partnership prepare their Financial Statements using the same Accounting Standards, and

• The transfer is undertaken for valid commercial or other non-fiscal reasons which reflect economic reality.

When a successful application results in the Unincorporated Partnership becoming a Taxable Person, i.e. fiscally opaque, this is treated for Corporate Tax purposes as each partner transferring their portion of the Unincorporated Partnership's assets and liabilities to the Unincorporated Partnership. However, the application does not trigger a legal transfer of assets and liabilities. In such circumstances, the no gain or loss treatment under Business Restructuring Relief can be available, even if the Unincorporated Partnership doesn't legally issue a consideration. In addition, the no gain or loss treatment will be available even if the partners of the Unincorporated Partnership are not Taxable Persons. ^[97]

Whether an application to be treated as a Taxable Person can be revoked

An application by the partners for the Unincorporated Partnership to be treated as a Taxable Person, once approved by the FTA, is irrevocable. ^[98] In other words, once an Unincorporated Partnership is treated as a Taxable Person, it will continue to be treated as such, until dissolved/liquidated. However, the application can be revoked under exceptional circumstances and pursuant to the approval by the FTA. ^[99]

Procedural aspects

Once the FTA approves the application for an Unincorporated Partnership to be treated as a Taxable Person, the Unincorporated Partnership is required to notify the FTA within 20 business days from the time any partner joins or leaves the Unincorporated Partnership. ^[100]

Implications of partners following different methods of accounting

If partners in a fiscally transparent Unincorporated Partnership follow different methods of accounting, i.e. accrual basis versus cash basis, and make an application for the Unincorporated Partnership to be treated as a Taxable Person, i.e. fiscally opaque, the partners should continue to apply their respective accounting methods in relation to transactions which occurred during the periods when the partnership was fiscally transparent. This is in order to prevent cases of non-taxation.

For example, if a partner follows the Cash Basis of Accounting it would not have included in its Taxable Income any income or expenditure accrued in a prior Tax Period when the Unincorporated Partnership was treated as fiscally transparent. When this is received or paid in a future Tax Period, when the Unincorporated Partnership is treated as fiscally opaque, it should be included in the Taxable Income of that partner (following Cash Basis of Accounting) at the time of receipt/payment. In other words, that partner (following Cash Basis of Accounting) should apply the method of accounting consistently.

Corporate Tax registration

Tax Returns

Tax Periods

A Tax Period of a Taxable Person is the period for which a Tax Return is required to be filed. This is the Gregorian calendar year for a natural person, or the 12-month period for which it prepares Financial Statements for a juridical person.

Financial Statements

The FTA can request any Taxable Person to submit the Financial Statements used to determine the Taxable Income for a particular Tax Period in the form and manner and within the timeline prescribed by the FTA. ^[107]

Where the partners of an Unincorporated Partnership have made an application to the FTA to treat the partnership as a Taxable Person, the FTA can request Financial Statements directly from the Unincorporated Partnership. ^[108]

In the case of a fiscally transparent Unincorporated Partnership, the FTA can request the authorised partner to provide Financial Statements showing the total assets, liabilities, income and expenditure of the Unincorporated Partnership along with each partner's distributive share in the Unincorporated Partnership's income, expenses, assets and liabilities. ^[109]

If the Revenue of a fiscally opaque Unincorporated Partnership exceeds AED 50 million during a Tax Period, then the partnership is required to prepare and maintain audited Financial Statements. ^[110] In the case of a fiscally transparent Unincorporated Partnership, the threshold of AED 50 million applies at the level of each partner, meaning the partner would be responsible for having their accounts audited if they exceed the threshold of AED 50 million.

Conditions to be treated as an Unincorporated Partnership

A Foreign Partnership is treated as a fiscally transparent Unincorporated Partnership for the purposes of the Corporate Tax Law provided it satisfies all of the following conditions: ^[112]

1. The Foreign Partnership is not subject to tax under the laws of the foreign jurisdiction where it is established. ^[113]

   If the foreign jurisdiction has a mixed approach where it considers the Foreign Partnership as fiscally transparent for certain tax purposes and fiscally opaque for other tax purposes, then that Foreign Partnership will not satisfy this condition.

   If the Foreign Partnership is established in a foreign jurisdiction that does not have tax legislation that addresses the tax treatment of partnerships, then that Foreign Partnership will be deemed to have met this condition.

2. 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. ^[114] Each partner in the Foreign Partnership will be considered to be subject to tax if they would be subject to tax on their distributive share of any income in the Foreign Partnership in the jurisdiction in which the partner is a tax resident. ^[115]

   If the Partners are tax resident in a foreign jurisdiction that does not have a tax legislation or tax legislation for individuals, then this condition will be deemed to have been satisfied.

3. The Foreign Partnership submits an annual declaration to the FTA to confirm that it has met the conditions (a) and (b) listed above. ^[116] The FTA will prescribe the form and manner and timeline of the declaration.

4. 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. ^[117] Examples of such arrangements are an Agreement with the UAE on Exchange of Information on Tax Matters, the Multilateral Convention on Mutual Administrative Assistance in Tax Matters established by the Organisation for Economic Cooperation and Development (OECD) or a Double Taxation Agreement with the UAE with Exchange of Information provisions.

Foreign Partnership not treated as an Unincorporated Partnership

If a Foreign Partnership does not meet the conditions specified in Section 8.2, then it will be regarded as a fiscally opaque entity for Corporate Tax purposes and will be subject to Corporate Tax in the UAE on the same basis as a Non-Resident Taxable Person if it has a Permanent Establishment or nexus in the UAE. ^[118]

Can a partnership be a Free Zone Person?

A Free Zone Person is a juridical person incorporated, established or otherwise registered under the rules and regulations of a Free Zone, including a branch of a foreign or a UAE juridical person registered in a Free Zone. ^[119]

Thus, incorporated partnerships which are treated as juridical persons as per the respective Free Zone laws could be treated as a Free Zone Person.

An Unincorporated Partnership that is not a juridical person cannot be a Free Zone Person. An Unincorporated Partnership that is treated as a Taxable Person (i.e. fiscally opaque) is not a juridical person. ^[120] Accordingly, such a fiscally opaque Unincorporated Partnership will not be covered under the definition of a Free Zone Person, even if all the partners of the fiscally opaque Unincorporated Partnership are juridical persons.

Can a Free Zone Person be a partner in an Unincorporated Partnership?

A partner in an Unincorporated Partnership can be either a natural or juridical person. As discussed above, a Free Zone Person is a juridical person and thus can be a partner in an Unincorporated Partnership.

Corporate Tax implications where a Free Zone Person is a partner in an Unincorporated Partnership

If the Unincorporated Partnership is fiscally transparent, the Free Zone partner would have to evaluate how it is subject to Corporate Tax on its distributive share from the Unincorporated Partnership depending on whether it is a Qualifying Free Zone Person earning Qualifying Income. ^[121]

If the Unincorporated Partnership is treated as a Taxable Person (i.e. fiscally opaque), the partnership itself would be subject to Corporate Tax. The tax treatment for a Free Zone Person, that is a partner in a fiscally opaque Unincorporated Partnership, is the same as for any other type of partner. The Free Zone partner can exclude, from its own Taxable Income, its distributive share of income in the Unincorporated Partnership, to the extent that the fiscally opaque Unincorporated Partnership has recognised such income as Taxable Income. ^[122]

Branch of Unincorporated Partnership in a Free Zone

As noted above, a Free Zone Person is a juridical person incorporated, established or otherwise registered under the rules and regulations of a Free Zone, including a branch of a foreign or a UAE juridical person registered in a Free Zone.

Since an Unincorporated Partnership (whether fiscally transparent or opaque) is not a juridical person, even if it sets up a branch in the Free Zone, it will not be eligible to benefit from the Free Zone Corporate Tax regime.

Overview and general principles

An Unincorporated Partnership is a Business relationship established by contract between two or more persons who jointly conduct the Business of the Unincorporated Partnership and agree to share the assets, liabilities, income and expenditure of the Unincorporated Partnership in proportion to their distributive share in that Unincorporated Partnership. ^[124]

A partner's distributive share

A partner's distributive share is a representation of each partner's proportionate rights and obligations in respect of the assets, liabilities, income and expenditure of the Unincorporated Partnership. ^[125] On the basis that an Unincorporated Partnership is a contract between the partners, the contract creates rights and obligations for each partner. The rights are defined by reference to the individual partner's distributive share. On establishment of the Unincorporated Partnership, typically each partner will contribute assets or capital to the partnership and effectively is contributing an undivided share of the asset or capital to the other partner(s). Such undivided share attributable to each partner of the assets, liabilities, income and expenditure is represented by the partner's distributive share. As such, this distributive share constitutes an asset in the hands of a partner for the purposes of Corporate Tax. Therefore, any change in the distributive share of a partner may result in a taxable event for the relevant partner. This is the case whether the Unincorporated Partnership is fiscally transparent or fiscally opaque.

Based on the above, there are Business events in relation to Unincorporated Partnerships which may have Corporate Tax implications for the partners. Examples of these Business events and the tax implications have been considered in the subsequent Sections.

Unincorporated Partnerships and Business events

Treatment of income or expenditure for a fiscally transparent Unincorporated Partnership after a partner leaves or retires

Once a partner leaves or retires from an Unincorporated Partnership, the partner ceases to carry on the Business and hold their distributive share in the Unincorporated Partnership, even though the Business may be continued by other partners. A partner who leaves, loses the right to their distributive share in the Unincorporated Partnership that arises after they exit the partnership Business.

There could be a situation that items of income or expenditure relating to the partnership's Business, at the time of partner's exit, are subsequently materialised at a different value. For example, a receivable previously written off is recovered, or an unanticipated expenditure (for example due to customer warranties) is payable after a partner leaves or retires.

In the case of a fiscally transparent Unincorporated Partnership, where the partners are treated as Taxable Persons, the treatment of any post-departure income or expenditure would be dealt with for Corporate Tax purposes in the Tax Period in which it is required to be accounted for by the partner, depending on the accounting method adopted by such partner. A partner that leaves or retires from the partnership Business is required to account for (on an accrual or cash basis) only such income and expenditure that relates to the Tax Period (or part thereof) when they were a partner in the fiscally transparent Unincorporated Partnership. The leaving or retiring partner will not be subject to Corporate Tax in relation to any income or expenditure that relates to a period after they cease to be a partner in the Unincorporated Partnership.

Thus, if the profit for the exiting partner's final period was adjusted, they would need to reflect that in their Tax Return. However, if the income or expense were recorded in a subsequent period, it would be reflected only in the remaining partners' Tax Returns, not the partner who had left in an earlier period. This principle is however subject to the commercial arrangement mutually agreed between the partners at the time of leaving or at the inception (i.e. in partnership deed/agreement).

In the case of a fiscally opaque Unincorporated Partnership, the partnership is treated as a Taxable Person that is subject to Corporate Tax in relation to the partnership Business. Any income or expenditure arising after a partner leaves or retires from the Business will be taken into account at the partnership level as Corporate Tax is paid at the partnership level. Hence, the above discussion is not applicable in case of a fiscally opaque Unincorporated Partnership.