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Does the corporate tax law apply to partnerships?

Partners can apply to the FTA for the unincorporated partnership to be treated as a taxable person, and if approved, the partnership shall be treated like a juridical person. After approval, each partner shall remain jointly and severally liable for the corporate tax payable to the FTA

In the day-to-day sessions, many people are asking about the application of corporate tax on the partnership. To understand it in a better way, we have classified the partnership into local partnership and foreign partnership. The local partnership can further be classified into unincorporated partnership and incorporated partnership.

The corporate tax law of the UAE states that an unincorporated partnership is “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 State”. Considering the above definition, we can conclude that an unincorporated partnership is merely a contract between the parties in accordance with the legislation of the UAE and has no legal personality, while the incorporated partnership has legal status.

Article 16(1) of the law requires that an unincorporated partnership itself shall not be considered a taxable person but the partners conducting the business as an unincorporated partnership shall be treated as taxable persons. Such unincorporated partnerships with no legal personality are called “transparent”, and the income of such partnerships is taxable in the hands of the partners in their respective share of income.

The unincorporated partnership's assets, business, intention, purpose, and arrangement shall be treated as partners' assets, business, intention, purpose, and arrangement. The unincorporated partnership's assets, liabilities, income and expenditure shall be allocated to each partner in proportion to their share or in the proportion determined by the Federal Tax Authority (FTA) where each partner's share cannot be identified. Interest expense on contributions in the capital account by each partner and any other expense directly related to the business of the partnership will be allowed as allowable expenses to each partner. Interest received on the partner’s capital account shall be treated as an allocation of income instead of allowable expense to the partners. Any foreign tax incurred by the unincorporated partnership shall be allocated as a foreign tax credit to each partner in proportion to their share.

For example, X and Y are in a partnership, and the partnership has made a profit of Dh100,000 in a tax period. It was agreed that X would take 75 per cent of the profit while Y would take 25 per cent. So, Dh75,000 will be taxable in the hands of X, and Dh25,000 will be taxable in the hands of Y after adjusting interest and other expenses directly related to the partnership.

Partners can apply to the FTA for the unincorporated partnership to be treated as a taxable person, and if approved, the partnership shall be treated like a juridical person. After approval, each partner shall remain jointly and severally liable for the corporate tax payable to the FTA. One partner shall be appointed as responsible for any obligations and proceedings related to the partnership. The status of an unincorporated partnership as a taxable person shall be effective from the beginning of the tax period in which the application was made, or any future tax period or any other period approved by the FTA.

Even if not applied by the partners, the FTA may require the unincorporated partnership to register for corporate tax and obtain a tax registration number. The FTA may request a partner in an unincorporated partnership to provide financial statements; if required, an unincorporated partnership shall be required to provide.

Where there is an incorporated partnership, and the liability of any of the partners is not unlimited (means all members have limited liability, or we can say that it is a limited liability partnership like a partnership limited by shares), such partnership shall be treated like a juridical person, and we know, the worldwide of income of the juridical resident person is subject to tax. In case there is an incorporated partnership, where the liability of any of the partners is unlimited, it will be treated like an unincorporated partnership.

The tax treatment of foreign partnerships in the UAE is the same as these partnerships are being treated in the respective country. If the foreign partnerships are not taxable, but each partner is individually subject to tax for their share of income, then these partnerships will also be considered “Transparent” in the UAE tax law. However, if the tax applies to partnerships in cross-border territory, it will be treated like a juridical person.

This is highly recommended to ascertain the status of the partnership and apply the corporate tax accordingly to avoid any penalties in the future.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above is not an official opinion of the Khaleej Times but a personal opinion of the writer. For any queries/clarifications, please write to the writer at mahar@kresscooper.com