Overview of Partnerships in the UAE: An In-Depth Analysis
What is a Partnership? A partnership is an arrangement, relationship, or contract between two or more individuals to conduct business together and share the resulting profits and losses. In the UAE, partnerships can be categorized as incorporated or unincorporated, with the key distinction being the legal personality – incorporated partnerships have a distinct legal identity from their partners.
1. Incorporated Partnerships: The classification of an entity as an incorporated partnership, endowed with a separate legal personality, is determined by the legislation under which it is established. Relevant legislation includes Federal, Emirate, and Free Zone laws and regulations. Several entities fall under the category of incorporated partnerships:
a) Joint Liability Company: Governed by the Commercial Companies Law, it consists of partners jointly and severally liable for the company’s obligations.
b) Limited Partnership Company: Established under the Commercial Companies Law, it involves joint partners with trading capacity and silent partners with limited liability.
c) Civil Company: Created under Article 92(e) of the Civil Code, it is a contract where individuals contribute to a pecuniary undertaking with the aim of sharing profits or losses.
d) General Partnership: Governed by the General Partnership Law of DIFC, it involves partners jointly and severally liable for the partnership’s debts.
e) Limited Liability Partnership: Established under the Limited Liability Partnership Law of DIFC, members have limited liability to contribute to the assets if the partnership is wound up.
f) Limited Partnership: Governed by the Limited Partnership Law of DIFC, it consists of general partners liable for all debts and limited partners with liability capped at their contribution.
Partnerships under (a), (b), and (c) are incorporated under UAE federal law, while others are often found in Free Zones. These partnerships have a separate legal identity, making them juridical persons under applicable legislation and Corporate Tax Law.
Corporate Tax Treatment: As juridical persons, incorporated partnerships are subject to Corporate Tax, aligning their treatment with other juridical entities like Limited Liability Companies (LLCs). Partners are not directly taxed on the partnership’s business, which is taxed at the partnership level. Dividends and profit distributions to partners are exempt from Corporate Tax, as the partnership is considered a Resident Person in the UAE.
2. Unincorporated Partnerships in the UAE
Definition: In the context of the UAE’s Corporate Tax Law, an Unincorporated Partnership is defined as a contractual relationship between two or more individuals, guided by the relevant legislation of the UAE. This relationship is formed with the purpose of conducting a business or project and sharing its resulting profits and losses. The contractual arrangement can be either verbal or written.
Legal Implications: Legally, the Business of the Unincorporated Partnership is considered synonymous with its owners, highlighting the absence of a separate legal identity for the partnership distinct from its partners.
Indicative Factors of Unincorporated Partnerships: Several factors serve as indicators that an entity or arrangement qualifies as an Unincorporated Partnership. These factors include:
- Contractual Agreement: A contract, whether written or verbal, entered into by all involved Persons.
- Profit and Loss Sharing Intention: The clear intention among partners to share the profits and losses arising from the business activities.
- Joint Business Activities: Partners actively engaging in and conducting business activities jointly.
- Lack of Separate Legal Personality: The partnership lacks a distinct legal personality separate from its individual partners.
Unincorporated Partnerships in Corporate Tax: Detailed Overview
1. Overview: An Unincorporated Partnership, defined by the Corporate Tax Law in the UAE, is a contractual relationship formed by two or more Persons, encompassing partnerships, trusts, or similar associations. This partnership structure does not necessitate a formal, written agreement and can take various forms, including trusts, without a separate legal personality.
2. Who can be a partner in an Unincorporated Partnership? Partners in an Unincorporated Partnership can be natural persons or juridical persons, encompassing a mix of individuals, companies, residents, non-residents, and combinations thereof. However, the absence of a distinct legal personality prevents an Unincorporated Partnership from being a partner in another partnership.
Key Features of an Unincorporated Partnership:
1. Liability for Corporate Tax: The contractual nature of an Unincorporated Partnership results in partners being jointly and severally liable for Corporate Tax. The partners are deemed to conduct the Business collectively and are responsible for the tax payable during their partnership.
2. Partnership Deed/Agreement: While a partnership deed or agreement typically governs the partnership, it is not obligatory for it to be in writing. Verbal agreements are also valid, covering essential terms like profit-sharing, contributions, rights, and obligations.
3. Distributive Share of Partners: Partners’ distributive shares, defining the allocation of assets, liabilities, income, and expenditure, are agreed upon either before or during the partnership through a written agreement. Disputes or changes may lead to equal distribution as determined by the FTA.
4. Capital Contributions: Partners contribute capital, either in cash or in kind, based on mutual agreements, with flexibility on amounts and forms of contribution. The total capital excludes amounts drawn out or received.
5. Payments to Partners: Partners may receive payments such as interest, salary, or service fees. Corporate Tax implications of such payments are explored in Section 5.
6. Dissolution of Partnership: Dissolution may be voluntary or compulsory, involving winding up the Business, settling accounts, and disposing of assets. Voluntary dissolution requires mutual agreement or fulfillment of the partnership’s purpose, while compulsory dissolution may occur due to insolvency or court orders.
Unincorporated Partnership treated as fiscally transparent:
By default, the Corporate Tax Law treats Unincorporated Partnerships as fiscally transparent, meaning they are not Taxable Persons. Instead, partners are individually subject to Corporate Tax based on their distributive share. Natural persons and juridical persons face distinct considerations.
1. Where a partner is a natural person: Natural persons in a fiscally transparent Unincorporated Partnership undergo Corporate Tax if their activities fall within the Corporate Tax scope. The nature of Business conducted and the threshold of AED 1 million determine Taxable Person status. Small Business Relief may apply if conditions are met.
2. Where a partner is a juridical person:
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- Juridical person that is a Resident Person: Subject to Corporate Tax based on distributive share, eligibility for Small Business Relief is considered.
- Juridical person that is a Non-Resident Person: Corporate Tax applies if a Permanent Establishment exists or State Sourced Income is generated in the UAE.
3. Mixed partnership: A mix of natural and juridical persons as partners is possible in Unincorporated Partnerships.
Unincorporated Partnership treated as fiscally opaque:
Partners can apply for fiscally opaque treatment. If approved, the Unincorporated Partnership becomes a Taxable Person, subject to Corporate Tax. Partners retain joint liability for Corporate Tax payable by the partnership.
Determining Taxable Income for Unincorporated Partnerships and Partners
The process of determining taxable income for Unincorporated Partnerships and their partners involves specific considerations based on the transparency status of the partnership. Here are the key points:
1. Taxable Persons and Transparency:
- Partners in an Unincorporated Partnership are considered taxable persons for the partnership’s business, unless an application is approved by the FTA to treat the partnership itself as a taxable person.
- Regardless of the taxable person (partners or partnership), each entity must determine taxable income separately using standalone Financial Statements prepared under International Financial Reporting Standards.
2. Audited Financial Statements:
- Partners as Taxable Persons (fiscally transparent): Each partner must prepare audited Financial Statements if their individual revenue exceeds AED 50 million.
- Unincorporated Partnership as Taxable Person (fiscally opaque): Audited Financial Statements are required if the partnership’s revenue exceeds AED 50 million.
3. Determining Taxable Income:
- Starting point: Accounting income (net profit or loss) for the relevant tax period as per Financial Statements.
- Adjustments: Apply general rules to adjust accounting income for tax purposes.
4. Treatment of Partners in Fiscally Transparent Partnerships:
- Partners need to jointly determine the partnership’s income, expenditure, and net income.
- Distributive share: Partners split income and expenditure based on their distributive share.
- Adding income: Partners add their share of partnership net income to their income from other businesses or activities.
5. Specific Considerations for Unincorporated Partnerships:
- Generally, income from the partnership’s business is included in each partner’s income according to their distributive share.
- Specific considerations: Certain income and expenditure arising in the Unincorporated Partnership context require unique treatment.
Tax Implications on Investment Income for Unincorporated Partnerships and Partners
The taxation of investment income for Unincorporated Partnerships and their partners involves specific considerations depending on the transparency status of the partnership. Here are the key points:
1. Investment Income – Dividends and Profit Distributions:
i. Fiscally Transparent Unincorporated Partnership:
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- Juridical Person Partners:
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- Dividends or profit distributions pass through to partners based on their distributive share.
- Taxable at the individual partner level.
- Exempt from Corporate Tax if received from a Resident Person or a Participating Interest in a foreign juridical person.
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- Natural Person Partners:
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- Dividends and profit distributions considered Personal Investment income.
- Exempt from Corporate Tax if received from a Participating Interest.
ii. Fiscally Opaque Unincorporated Partnership:
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- All income, including dividends and profit distributions, is treated at the partnership level.
- Exempt from Corporate Tax if received from a Participating Interest.
2. Gains or Losses on Sale of Shares:
i. Fiscally Transparent Unincorporated Partnership:
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- Juridical Person Partners:
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- Gains or losses pass through to partners.
- Taxable at the individual partner level.
- Exempt from Corporate Tax if received from a Participating Interest.
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- Natural Person Partners:
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- Treated as Personal Investment income if conducted on a personal account.
- Exempt from Corporate Tax if received from a Participating Interest.
ii. Fiscally Opaque Unincorporated Partnership:
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- All gains or losses on the sale of shares are treated at the partnership level.
- Exempt from Corporate Tax if received from a Participating Interest.
3. Considerations for Natural Person Partners:
- Personal Investment Income:
- Applies to dividends and profit distributions from foreign juridical persons.
- Applicable to gains or losses on the sale of shares conducted personally.
- Business Activity:
- If received in the course of a business activity, not considered Personal Investment income.
- Conditions of the Participation Exemption need to be considered.
4. Corporate Tax Implications on Profit Distribution and Transfer of Distributive Share in Unincorporated Partnerships
The Corporate Tax implications regarding the distribution of profits to partners and the transfer of a partner’s distributive share in an Unincorporated Partnership are outlined as follows:
1. Profit Distribution:
i. Fiscally Transparent Unincorporated Partnership:
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- Taxation at Partner Level:
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- Income from the Business of the partnership is subject to Corporate Tax at the partner level.
- Taxable based on the distributive share of each partner.
- Different treatment for natural persons and juridical persons.
ii. Fiscally Opaque Unincorporated Partnership:
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- Exclusion from Partner’s Taxable Income:
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- Any income received by a partner is not considered in determining the partner’s Taxable Income.
- The income is already accounted for in the determination of the Taxable Income of the fiscally opaque partnership.
2. Transfer of Partner’s Distributive Share:
i. Fiscally Transparent Unincorporated Partnership:
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- Treated as Business Income:
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- Partners are deemed to be conducting the Business of the partnership.
- Gain or loss on the transfer, sale, or disposal of a partner’s distributive share is treated as Business income.
- Subject to Corporate Tax at the partner level.
ii. Fiscally Opaque Unincorporated Partnership:
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- Participation Exemption:
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- Gain or loss on the transfer, sale, or disposal of a partner’s distributive share is not subject to Corporate Tax if it meets conditions specified in Article 23(2) of the Corporate Tax Law (Participation Exemption).
- The FTA applies the Participation Exemption, even though the Unincorporated Partnership itself is not a juridical person.
Deductible Expenditure in Unincorporated Partnerships
The determination of deductible expenditure for Unincorporated Partnerships involves adherence to general Corporate Tax rules with specific considerations for transparency status. Key points are outlined below:
1. General Deductibility Rule:
- Applicability to Partners and Unincorporated Partnerships:
- The general Corporate Tax rules on deductible expenditure apply similarly to both partners and Unincorporated Partnerships treated as Taxable Persons.
2. Treatment of Fiscally Transparent Unincorporated Partnership:
- Inclusion of Distributive Share:
- In a fiscally transparent Unincorporated Partnership, a partner’s Taxable Income must consider their distributive share of expenditure.
- Direct expenditure by the partner in conducting the partnership’s business is also factored into the partner’s Taxable Income.
3. Expenditure for Business Purposes:
- Deductibility Criteria:
- Expenditure incurred wholly and exclusively for Business purposes is deductible, provided it is not of a capital nature.
- If expenditure serves multiple purposes, only the portion identifiable or reasonably allocable to the Business is allowed as a deduction.
4. Non-Deductible Expenditure:
- Specific Restrictions:
- Certain types of expenditure are restricted or disallowed, including dividends, profit distributions, or similar payments to an owner of the Taxable Person.
- Amounts withdrawn by a partner in an Unincorporated Partnership are non-deductible.
5. Impact on Taxable Income:
- Fiscally Opaque Unincorporated Partnership:
- Expenditure constituting payments to partners is not deductible for a fiscally opaque Unincorporated Partnership, treated as dividends or profit distributions.
6. Fiscally Transparent Unincorporated Partnership:
- Similar payments are treated as amounts withdrawn by partners, disallowing deduction and impacting the partners’ Taxable Income.
Interest Expenditure in Unincorporated Partnerships
The treatment of interest expenditure in Unincorporated Partnerships is subject to specific rules and limitations under Corporate Tax Law. The key points are detailed below:
1. Interest Expenditure Deductibility:
- General Rule:
- Interest incurred for the purpose of a Taxable Person’s Business is deductible, subject to General and Specific Interest Deduction Limitation Rules.
2. General Interest Deduction Limitation Rule:
- Applicability:
- Net Interest Expenditure exceeding AED 12 million is subject to the General Interest Deduction Limitation Rule.
- The limitation is based on 30% of adjusted EBITDA or AED 12 million, whichever is greater.
- Unused Net Interest Expenditure can be carried forward for ten Tax Periods.
3. Applicability to Unincorporated Partnerships:
- Fiscally Transparent Unincorporated Partnership:
- The rule is applied at the individual partner level.
- Natural persons are excluded from the rule.
- Juridical persons within the partnership are subject to the limitation.
- Fiscally Opaque Unincorporated Partnership:
- The rule is applied at the partnership level, irrespective of partner types.
4. Allocation of Unutilized Net Interest Expenditure:
- Fiscally Opaque Unincorporated Partnership:
- Unutilized Net Interest Expenditure is carried forward for the partnership’s use, not allocated to individual partners.
- Exiting partners do not receive a portion of the carried forward amount.
5. Specific Interest Deduction Limitation Rule:
- Restrictions on Deductions:
- No deduction allowed for interest on loans from Related Parties related to specific transactions.
- Exemptions apply if the loan’s main purpose is not for Corporate Tax advantage or the Related Party is taxed at a minimum 9% on interest income.
6. Interest on Capital Contribution:
- Fiscally Transparent Unincorporated Partnership:
- Interest on capital contribution is treated as an allocation of income to partners and is not deductible for tax calculation.
- Fiscally Opaque Unincorporated Partnership:
- Interest on capital contribution is treated as a profit distribution and is not deductible for tax calculation.
7. Interest on Loans Advanced by Partners:
- Treatment:
- Deductibility depends on whether the partnership is transparent or opaque.
- Deduction is allowed if the interest is at arm’s length and for the business’s purposes.
8. Interest on Loans for Capital Contributions:
- Deductibility:
- Interest incurred on loans to fund individual capital contributions is deductible for partners, subject to General and Special Interest Deduction Limitation Rules.
Salary Paid to Partners:
- Fiscally Transparent Unincorporated Partnership:
- Implications for the Partnership: Not applicable as fiscally transparent partnerships are not treated as Taxable Persons.
- Implications for Partners (Natural Persons): Salary paid is treated as a withdrawal from the Business, non-deductible for Corporate Tax purposes.
- Fiscally Opaque Unincorporated Partnership:
- Implications for the Partnership: Salary paid is treated as profit distributions or similar benefits, non-deductible for Corporate Tax.
- Implications for Partners (Natural Persons): Received salary is excluded from the Taxable Income of the partner, having already been subject to Corporate Tax at the partnership level.
Payment for Services Provided by Partners:
- Fiscally Transparent Unincorporated Partnership:
- Implications for the Partnership (Expenditure): Not applicable as fiscally transparent partnerships are not treated as Taxable Persons.
- Implications for Partners (Expenditure): Payments for services are deductible if provided wholly and exclusively for the Business and at arm’s length.
- Fiscally Opaque Unincorporated Partnership:
- Implications for the Partnership (Expenditure): Payments for services are deductible if the services are provided wholly and exclusively for the Business and meet arm’s length standards.
- Implications for Partners (Income): Income received for services is included in the partner’s Taxable Income, subject to Corporate Tax rules for natural and juridical persons.
Additional Notes:
- Natural Person Partners:
- Income from services may be subject to Corporate Tax if their total Turnover from Business conducted in the UAE exceeds AED 1 million in a calendar year.
- Juridical Person Partners:
- Income from services is generally considered part of their Taxable Income for Corporate Tax.
Reimbursement of Expenditure:
- Fiscally Transparent Unincorporated Partnership:
- Implications for the Partnership: Not applicable as fiscally transparent partnerships are not Taxable Persons.
- Implications for Partners:
- Reimbursed costs are deductible by partners in proportion to their distributive share.
- Income received is set off against the expenditure incurred by the partner based on relevant Accounting Standards.
- Fiscally Opaque Unincorporated Partnership:
- Implications for the Partnership: Reimbursement is deductible for the partnership, subject to general deductibility rules.
- Implications for Partners: Expenditure and reimbursement are set off in determining the partner’s own Taxable Income, separate from that of the partnership.
Tax Loss Relief and Limitation:
- A Taxable Person can offset Tax Loss up to 75% of Taxable Income for the relevant Tax Period.
- Unutilized Tax Loss can be carried forward indefinitely.
- Conditions for Carry Forward:
- Continuity of ownership: At least 50% ownership remains the same.
- Continuity of Business: If ownership changes, the Tax Loss can still be carried forward if the Business continues.
- In Unincorporated Partnerships:
- Relevant if fiscally opaque and ownership changes by more than 50%.
- Tax Loss can only offset the Taxable Income of the partnership, not individual partners.
- Exiting partners do not receive any allocation of Tax Loss.
Foreign Tax Credit:
- Available for Unincorporated Partnerships suffering foreign tax.
- Credit allocation among partners based on distributive share for fiscally transparent partnerships.
- Applicable to the Unincorporated Partnership if treated as a Taxable Person.
Application to be Treated as Taxable Person for Unincorporated Partnerships
1. Application and Timing:
- Partners can apply for an Unincorporated Partnership to be treated as a Taxable Person.
- Approved applications result in Taxable Person status from the start of the applied Tax Period, a future period, or a specified date.
2. Corporate Tax Consequences:
- Change from fiscally transparent to fiscally opaque may trigger Business Restructuring Relief for gains/losses on transfers.
- Conditions for Business Restructuring Relief:
- Compliance with UAE legislation.
- Partners and partnership subject to UAE Corporate Tax.
- Not involving Exempt Persons or Qualifying Free Zone Persons.
- Partners and partnership share Financial Year and Accounting Standards.
- Transfer for valid non-fiscal reasons reflecting economic reality.
3. Irrevocability of Application:
- Once approved, an application to be treated as a Taxable Person is irrevocable.
- Exceptional circumstances may allow revocation upon FTA approval.
4. Procedural Aspects:
- Upon approval, the Unincorporated Partnership must notify the FTA of partner additions or departures within 20 business days.
5. Implications of Different Accounting Methods:
- Partners with different accounting methods (e.g., accrual vs. cash basis) should continue their respective methods for transactions during fiscally transparent periods.
- Consistency in applying accounting methods prevents cases of non-taxation.
Corporate Tax Compliance Obligations for Unincorporated Partnerships
1. Corporate Tax Registration:
Fiscally Transparent Unincorporated Partnership:
- Individual partners determine Corporate Tax obligations based on their share.
- Natural persons register if turnover exceeds AED 1 million; juridical persons are already registered.
- Appoint an authorized partner for tax obligations.
Fiscally Opaque Unincorporated Partnership:
- Partners can apply to treat the partnership as a Taxable Person.
- If approved, partnership becomes subject to Corporate Tax.
2. Tax Returns:
Fiscally Transparent Unincorporated Partnership:
- No partnership-level Tax Return; partners file individual returns.
- Authorized partner files annual declaration on behalf of partners.
Fiscally Opaque Unincorporated Partnership:
- Partnership files Tax Return if treated as a Taxable Person.
3. Tax Periods:
Fiscally Transparent Unincorporated Partnership:
- Partners follow individual Tax Periods.
- Authorized partner files declaration within 9 months from the end of the relevant Financial Year.
Fiscally Opaque Unincorporated Partnership:
- Follows Tax Period based on Financial Statements preparation.
4. Financial Statements:
- FTA can request Financial Statements for Taxable Persons.
- Audited Financial Statements required if revenue exceeds AED 50 million, applicable at the partner level for fiscally transparent partnerships.
Tax Treatment of Foreign Partnerships
1. Definition of Foreign Partnership:
- A Foreign Partnership is a contractual relationship between two or more entities established under foreign laws.
2. Conditions for Treatment as Unincorporated Partnership:
Not Subject to Foreign Tax:
- The Foreign Partnership must not be subject to tax in the foreign jurisdiction where it is established.
- Exception: If the foreign jurisdiction has a mixed approach, considering the partnership as fiscally transparent for some tax purposes and opaque for others.
Individual Taxation of Partners:
- Each partner should be individually taxed on their share of income as and when received or accrued by the Foreign Partnership.
- Considered met if partners would be taxed on their share in the jurisdiction of their tax residency.
Annual Declaration:
- The Foreign Partnership must submit an annual declaration to the FTA confirming compliance with conditions.
Adequate Information Sharing Arrangements:
- Adequate arrangements for tax information cooperation between the UAE and the foreign jurisdiction.
- Examples include agreements on the exchange of tax information or Double Taxation Agreements.
3. Non-Qualification as Unincorporated Partnership:
- If the Foreign Partnership fails to meet the specified conditions, it is treated as fiscally opaque for Corporate Tax purposes.
- Subject to Corporate Tax in the UAE as a Non-Resident Taxable Person if it has a Permanent Establishment or nexus in the UAE.
Interaction with Free Zone Persons
1. Free Zone Person Definition:
- A Free Zone Person is a juridical person established under Free Zone regulations, including branches of foreign or UAE entities in a Free Zone.
2. Partnerships as Free Zone Persons:
Incorporation Requirement:
- Incorporated partnerships treated as juridical persons under Free Zone laws qualify as Free Zone Persons.
- Unincorporated Partnerships, not being juridical persons, are not Free Zone Persons, even if all partners are juridical persons.
3. Free Zone Person as a Partner:
- A Free Zone Person, being a juridical entity, can be a partner in an Unincorporated Partnership.
4. Corporate Tax Implications:
Fiscally Transparent Unincorporated Partnership:
- The Free Zone partner assesses Corporate Tax based on Qualifying Free Zone Person status and Qualifying Income criteria.
Fiscally Opaque Unincorporated Partnership:
- The Unincorporated Partnership is subject to Corporate Tax.
- Tax treatment for a Free Zone partner aligns with other partners; it can exclude its share of income recognized by the partnership as Taxable Income.
5. Branches in Free Zones:
- Unincorporated Partnerships, whether fiscally transparent or opaque, are ineligible for Free Zone Corporate Tax benefits even if they establish branches in Free Zones.
Small Business Relief:
- Eligibility Criteria:
- Available to Resident Persons.
- Revenue must not exceed AED 3 million in the current and previous Tax Periods.
- Application to Unincorporated Partnerships:
- Fiscally Transparent: Eligibility assessed at the individual partner level.
- Fiscally Opaque: Eligibility determined at the Unincorporated Partnership level.
Unincorporated Partnership and Business Events:
- Overview:
- Unincorporated Partnership defined as a Business relationship with shared assets, liabilities, income, and expenditure among partners.
- Partner’s Distributive Share:
- Represents a partner’s proportional rights and obligations in the partnership.
- Change in distributive share triggers taxable events for partners, applicable to both fiscally transparent and opaque partnerships.
- Business Events and Tax Implications:
- Change in Distributive Share:
- Joining, leaving, or changes in distributive share may lead to gains or losses, considered taxable events.
- Disposal of Distributive Share:
- Disposal of distributive share triggers a taxable event for the partner, with gains or losses considered for Taxable Income.
- Consideration for Transfer or Sale:
- Consideration for transfer or sale must meet the arm’s length standard.
- Lack of compensation not indicative of non-arm’s length transaction in specific scenarios.
- Cost of Acquisition:
- The cost of acquiring a distributive share is recorded in the balance sheet, can be in cash or in-kind.
- Application for Fiscally Transparent to Opaque:
- Application approval shifts Corporate Tax liability to the partnership without affecting individual partners’ distributive shares.
- Transfer of Partnership’s Business:
- Transfer may trigger taxable gains or losses for partners unless Business Restructuring Relief applies.
Treatment of Income or Expenditure for a Fiscally Transparent Unincorporated Partnership after a Partner Leaves or Retires
Post-Exit Treatment for a Fiscally Transparent Unincorporated Partnership:
- Partner’s Ceasing of Business:
- Upon exit, a partner loses the right to their distributive share.
- Income or expenditure realization after exit may differ from the recorded value at the time of departure.
- Tax Treatment:
- Fiscally Transparent Partnership:
- Partners treated as Taxable Persons.
- Post-exit income or expenditure accounted for in the Tax Period it’s due according to partner’s accounting method.
- Leaving partner not taxed for income/expenditure post-exit, only for the relevant period.
- Commercial Arrangements:
- Subject to mutual agreements in the partnership deed/agreement.
- Fiscally Opaque Partnership:
- Treated as a Taxable Person at the partnership level.
- Income or expenditure post-exit considered at the partnership level.
- Exiting partner remains liable for Corporate Tax for periods they were part of the partnership.
Corporate Tax Payable Post-Exit:
- Fiscally Transparent Partnership:
- Corporate Tax paid individually by partners based on distributive shares.
- Fiscally Opaque Partnership:
- Joint and several liability of exiting partner for Corporate Tax Payable during their participation.
- Profits or losses allocated based on the distributive share before and after the exit.
- Exiting partner remains liable for Corporate Tax Payable for the periods they were a partner.
Transfer Pricing and Arm’s Length Standard:
- Objective:
- Corporate Tax Law includes transfer pricing rules to prevent transaction value distortion.
- Application of internationally recognized arm’s length standard to transactions between Related Parties.
- Definitions:
- Related Parties and Control:
- Article 35 defines Related Parties and Control.
- Applicable to various Corporate Tax Law provisions, especially transfer pricing rules.
- Unincorporated Partnerships:
- Connected Persons:
- Partners within an Unincorporated Partnership treated as Connected Persons.
- Transactions between partners or Related Parties within the partnership should adhere to the arm’s length standard.
- Tax Deductibility:
- Payment to Connected Person:
- Payments or benefits from a Taxable Person to a Connected Person are deductible if:
- At Market Value.
- Incurred wholly and exclusively for the Taxable Person’s Business purpose.
General Anti-Abuse Rule (GAAR):
- Objective:
- Empowers FTA to counteract or adjust transactions lacking commercial substance.
- Aims to prevent obtaining a Corporate Tax advantage inconsistent with the Corporate Tax Law’s intention.
- Application:
- Criteria:
- Transaction lacks commercial substance or doesn’t reflect economic reality.
- Undertaken for the main purpose, where one main purpose is obtaining a non-compliant Corporate Tax advantage.
- FTA Authority:
- Counteraction Measures:
- FTA can disallow exemptions, deductions, relief, reallocating income, or disregarding the tax effect.
- Counteraction applies to partnerships and partners engaging in transactions for a primary tax advantage purpose.
- Example:
- Establishment for Tax Advantage:
- If a partnership is formed or altered to gain a Corporate Tax advantage, it may be subject to GAAR adjustment and penalties.
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