UAE Ministerial Decision amends tax treatment of Foreign Partnerships and Family Foundations

On 18 November 2024, the UAE Ministry of Finance (MOF) issued Ministerial Decision No. 261 of 2024, which repeals the previous Ministerial Decision No. 127 of 2023. Ministerial Decision No. 261 includes important changes to the tax treatment of Foreign Partnerships and Family Foundations, which provide significant relaxation of the previously applicable conditions.   

 

Foreign Partnerships

The UAE introduced Corporate Income Tax (CIT) effective from 1 June 2023. The new regime recognizes unincorporated partnerships and allows them to be treated as fiscally transparent (i.e., with look-through treatment), provided certain conditions are met. This means that the income of the partnership is directly allocated to the partners for tax purposes. This concept, commonly known in the Investment Funds industry, is internationally recognized and widely used in partnership structures.

Initially, however, the tax transparency of foreign partnerships was contingent on relatively stringent conditions. Due to the practical challenges of meeting these requirements, the UAE MOF has now significantly relaxed the requirements for foreign partnerships to be treated as fiscally transparent from a UAE perspective.

Ministerial Decision No. (261) of 2024 (new Ministerial Decision) has replaced the previous Ministerial Decision No. (127) of 2023 (previous Ministerial Decision), which addressed, among other matters, the fiscal transparency of foreign partnerships under the UAE CIT regime. Under the previous Ministerial Decision, foreign partnerships were only eligible for tax transparency if they satisfied the following conditions:

• The partnership was not subject to tax in its (foreign) jurisdiction,
• All partners were individually subject to tax with regards to their distributive share of partnership income (which required all partners to treat the partnership as transparent); and
• The partnership jurisdiction had adequate arrangements in place for tax cooperation (i.e., sharing of tax information).

These conditions proved difficult to meet and apply in practice, leading to concerns from industry professionals about their feasibility when the previous Ministerial Decision was published.

The new Ministerial Decision simplifies the rules. Foreign partnerships will now be treated as transparent for UAE CIT purposes if they are treated as transparent in their home jurisdiction. There are no further requirements at the partner level. Additionally, foreign partnerships will be required to submit an annual declaration to the UAE tax authority confirming their status in their home jurisdiction.

 

Family Foundations

Under the CIT regime, a Foundation can elect to be treated as an Unincorporated Partnership as a result of which the beneficial owners will instead be treated as the owners of the Foundation's assets and the recipients of the relevant income, for tax purposes.

As per the new Ministerial Decision, a legal person can also apply with the FTA to be treated as an Unincorporated Partnership if the legal person is wholly owned and controlled by a Family Foundation that is treated as an Unincorporated Partnership.

This expansion of the of the Family Foundation regime will be particularly helpful for holding companies owned by Family Foundations, and enhances simplification for the asset management sector, focusing on within private client and family structures.

The new Ministerial Decision No. 261 has retroactive effect to the date in which the CIT regime entered into effect, 1 June 2023.

 

Conclusion

Ministerial Decision No. 261 includes important changes to the tax treatment of Foreign Partnerships and Family Foundations, which provide significant relaxation of the previously applicable conditions, and makes these vehicles and structures more user-friendly.