UAE issues Guide on Taxation of Partnerships

From a UAE Corporate Income Tax (CIT) perspective, legal entities that are incorporated, established or recognized in the UAE are considered taxable persons in their own right. This principle does not fully apply to partnerships, given that there are several factors involved in determining whether a partnership is taxable in its own right, or whether it is treated as fiscally transparent for UAE CIT purposes.

The first step in determining the tax treatment applicable to a UAE registered partnership is to establish whether it can be considered as an incorporated or unincorporated partnership.

An incorporated partnership has a separate legal personality, and is a taxable person subject to CIT. On the other hand, an unincorporated partnership is not considered a taxable person in its own right and is treated as fiscally transparent. From a practical perspective, this means that there is no taxation at the level of the partnership, but instead the income of the unincorporated partnership is considered to ‘flow through’ the entity and is taxable only in the hands of the partners or members themselves according to their respective shares in that income (‘flow through’ or ‘look through’ treatment). Where the partners of an unincorporated partnership have applied to the Federal Tax Authority (FTA) to treat the partnership as a (standalone) taxable person, the partnership will be considered fiscally ‘opaque’.

Guide on taxation of partnerships

In March 2024, the UAE FTA issued a guide on the taxation of partnerships¹ (the Guide), providing further clarification on how the different types of partnerships, and their partners, will be taxed under the new CIT regime.

From CIT compliance perspective, individual partners of a fiscally transparent partnership may be required to register for CIT, depending on their specific individual circumstances (UAE legal persons who are a partner in such partnership will need to register for CIT regardless). Where an unincorporated partnership is considered fiscally opaque, it will be treated as a taxable person and will need to register for CIT.

Whilst an incorporated partnership is subject to CIT, there is no taxation at the level of the unincorporated partnership itself (unless it is fiscally opaque). Instead, the partners of the unincorporated partnership are subject to tax individually on their distributive share of income of the unincorporated partnership. The Guide further clarifies that the tax rules on deductible expenses apply similarly to partners and fiscally opaque partnerships. In fiscally transparent partnerships, the partners’ taxable income must also account for their respective share of expenses.

From a transfer pricing perspective, the Guide indicates that transactions between related parties, including partners in unincorporated partnerships and any related parties of a partner in an unincorporated partnership, must adhere to the arm’s length principle.

Whilst the UAE CIT’s Free Zone Tax Regime is available for incorporated partnerships that are based in a Qualifying Free Zone (provided conditions are met), this is not the case for unincorporated partnerships that are treated as a taxable person (i.e., fiscally opaque) for CIT purposes. Because an unincorporated partnership is not a legal person, even if it sets up a branch in a Qualifying Free Zone, it would still not be able to benefit from the Free Zone Tax Regime.

The Guide further stipulates that a foreign partnership will be treated as a fiscally transparent unincorporated partnership if it satisfies the following conditions: (i) the partnership is not taxed in its home jurisdiction, (ii) its partners are individually subject to tax on their share of the partnership’s income, (iii) the partnership submits an annual declaration to the FTA, and (iv) adequate tax information exchange arrangements are in place between the partnership’s jurisdiction and the UAE.

Conclusion

Tax rules regarding partnerships and their partners are usually relatively complex. The UAE is no exception, and the application of the UAE’s CIT regime on partnerships and their partners depends on various specific factors and circumstances. With the Guide on the taxation of partnerships, the FTA has provided further clarification around the taxation of partnerships and their partners.