1. Glossary
Accounting Income: The accounting net profit or loss for the relevant Tax Period as per the Financial Statements prepared in accordance with the provisions of Article 20 of the Corporate Tax Law.
Accounting Standards: The accounting standards specified in Ministerial Decision No. 114 of 2023.
Accrual Basis of Accounting: An accounting method under which the Taxable Person recognises income when earned and expenditure when incurred.
AED: The United Arab Emirates dirham.
Authority: Federal Tax Authority.
Business: Any activity conducted regularly, on an ongoing and independent basis by any Person and in any location, such as industrial, commercial, agricultural, vocational, professional, service or excavation activities or any other activity related to the use of tangible or intangible properties.
Business Activity: Any transaction or activity, or series of transactions or series of activities conducted by a Person in the course of its Business.
Business Restructuring Relief: A relief from Corporate Tax for business restructuring transactions, available under Article 27 of the Corporate Tax Law and as specified under Ministerial Decision No. 133 of 2023.
Cash Basis of Accounting: An accounting method under which the Taxable Person recognises income and expenditure when cash payments are received and paid.
Connected Person: Any Person affiliated with a Taxable Person as determined in Article 36(2) of the Corporate Tax Law.
Corporate Tax: The tax imposed by the Corporate Tax Law on juridical persons and Business income.
Corporate Tax Law: Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, and its amendments.
Corporate Tax Payable: Corporate Tax that has or will become due for payment to the FTA in respect of one or more Tax Periods.
Dividend: Any payments or distributions that are declared or paid on or in respect of shares or other rights participating in the profits of the issuer of such shares or rights which do not constitute a return on capital or a return on debt claims, whether such payments or distributions are in cash, securities, or other properties, and whether payable out of profits or retained earnings or from any account or legal reserve or from capital reserve or revenue. This will include any payment or benefit which in substance or effect constitutes a distribution of profits made in connection with the acquisition or redemption or cancellation of shares or termination of other ownership interests or rights or any transaction or arrangement with a Related Party or Connected Person which does not comply with Article 34 of the Corporate Tax Law.
Double Taxation Agreement: An international agreement signed by two or more countries for the avoidance of double taxation and the prevention of fiscal evasion on income and capital.
Exempt Income: Any income exempt from Corporate Tax under the Corporate Tax Law.
Financial Statements: A complete set of statements as specified under the Accounting Standards applied by the Taxable Person, which includes, but is not limited to, statement of income, statement of other comprehensive income, balance sheet, statement of changes in equity and cash flow statement.
Financial Year: The Gregorian calendar year, or the twelve-month period for which the Taxable Person prepares Financial Statements.
Foreign Partnership: 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 laws of a foreign jurisdiction.
Foreign Tax Credit: Tax paid under the laws of a foreign jurisdiction on income or profits that may be deducted from the Corporate Tax due, in accordance with the conditions of Article 47(2) of the Corporate Tax Law.
Free Zone: A designated and defined geographic area within the UAE that is specified in a decision issued by the Cabinet at the suggestion of the Minister.
Free Zone Person: A juridical person incorporated, established or otherwise registered in a Free Zone, including a branch of a Non-Resident Person registered in a Free Zone.
FTA: Federal Tax Authority, being the Authority in charge of administration, collection and enforcement of federal taxes in the UAE.
General Interest Deduction Limitation Rule: The limitation provided under Article 30 of the Corporate Tax Law.
General Interest Deduction Limitation Rule: The limitation provided under Article 30 of the Corporate Tax Law.
IFRS: International Financial Reporting Standards.
IFRS for SMEs: International Financial Reporting Standard for small and mediumsized entities.
Interest: Any amount accrued or paid for the use of money or credit, including discounts, premiums and profit paid in respect of an Islamic financial instrument and other payments economically equivalent to interest, and any other amounts incurred in connection with the raising of finance, excluding payments of the principal amount.
Licence: A document issued by a Licensing Authority under which a Business or Business Activity is conducted in the UAE.
Licensing Authority: The competent authority concerned with licensing or authorising a Business or Business Activity in the UAE.
Market Value: The price which could be agreed in an arm’s-length free market transaction between Persons who are not Related Parties or Connected Persons in similar circumstances.
Net Interest Expenditure: The Interest expenditure amount that is in excess of the Interest income amount as determined in accordance with the provisions of the Corporate Tax Law.
Non-Resident Person: The Taxable Person specified in Article 11(4) of the Corporate Tax Law.
Participating Interest: An ownership interest in the shares or capital of a juridical person that meets the conditions referred to in Article 23 of the Corporate Tax Law.
Participation: The juridical person in which the Participating Interest is held.
Participation Exemption: An exemption from Corporate Tax for income from a Participating Interest, available under Article 23 of the Corporate Tax Law and as specified under Ministerial Decision No. 116 of 2023.
Permanent Establishment: A place of Business or other form of presence in the UAE of a Non-Resident Person in accordance with Article 14 of the Corporate Tax Law.
Person: Any natural person or juridical person.
Personal Investment: Investment activity that a natural person conducts for their personal account that is neither conducted through a Licence or requiring a Licence from a Licensing Authority in the UAE, nor considered as a commercial business in accordance with the Federal Decree-Law No. 50 of 2022.
Qualifying Free Zone Person: A Free Zone Person that meets the conditions of Article 18 of the Corporate Tax Law and is subject to Corporate Tax under Article 3(2) of the Corporate Tax Law.
Qualifying Income: Any income derived by a Qualifying Free Zone Person that is subject to Corporate Tax at the rate specified in Article 3(2)(a) of the Corporate Tax Law.
Real Estate Investment: Any investment activity conducted by a natural person related to, directly or indirectly, the sale, leasing, sub-leasing, and renting of land or real estate property in the UAE that is not conducted, or does not require to be conducted through a Licence from a Licensing Authority.
Related Party: Any Person associated with a Taxable Person as determined in Article 35(1) of the Corporate Tax Law.
Resident Person: The Taxable Person specified in Article 11(3) of the Corporate Tax Law.
Revenue: The gross amount of income derived during a Tax Period.
Small Business Relief: A Corporate Tax relief that allows eligible Taxable Persons to be treated as having no Taxable Income for the relevant Tax Period in accordance with Article 21 of the Corporate Tax Law and Ministerial Decision No. 73 of 2023.
Specific Interest Deduction Limitation Rule: The limitation provided under Article 31 of the Corporate Tax Law.
State: United Arab Emirates.
State Sourced Income: Income accruing in, or derived from, the UAE as specified in Article 13 of the Corporate Tax Law.
Subsidiary: A Resident Person in which the share capital or Membership or Partnership Capital, as applicable, is held by a Parent Company, in accordance with Article 40(1) of the Corporate Tax Law.
Tax Group: Two or more Taxable Persons treated as a single Taxable Person according to the conditions of Article 40 of the Corporate Tax Law.
Tax Loss: Any negative Taxable Income as calculated under the Corporate Tax Law for a given Tax Period.
Tax Period: The period for which a Tax Return is required to be filed.
Tax Registration: A procedure under which a Person registers for Corporate Tax purposes with the FTA.
Tax Registration Number: A unique number issued by the FTA to each Person who is registered for Corporate Tax purposes in the UAE.
Tax Return: Information filed with the FTA for Corporate Tax purposes in the form and manner as prescribed by the FTA, including any schedule or attachment thereto, and any amendment thereof.
Taxable Income: The income that is subject to Corporate Tax under the Corporate Tax Law.
Taxable Person: A Person subject to Corporate Tax in the UAE under the Corporate Tax Law.
Turnover: The gross amount of income derived during a Gregorian calendar year.
UAE: United Arab Emirates.
Unincorporated Partnership: 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.
Withholding Tax: Corporate Tax to be withheld from State Sourced Income in accordance with Article 45 of the Corporate Tax Law.
2. Introduction
2.1. 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.
2.2. 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.
2.3. 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.
2.4. 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 topicspecific 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.
2.5. 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”.
2.6. 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.
3. Overview of partnerships
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.
3.2. 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.
a) 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
b) 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
c) 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.
d) 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
e) 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
f) 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
3.3. 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:
Example 1: Mere use of the expression “partners” not decisive
Two brothers each carry on a separate, independent Business from the same premises. They acquired the premises through a mortgage loan. The mortgage documents refer to the brothers as “partners”.
However, the two brothers do not conduct a joint Business and have no intention of sharing the profits and losses of their independent Businesses. The simple use of the expression “partners” cannot by itself be treated as the basis for concluding that a partnership exists.
Example 2: Joint profit-seeking motive
The brothers mentioned in the above example decide, through a verbal agreement, to use part of the premises as a joint canteen (potentially profit-making) to sell food to the employees working for their respective Businesses. This will be considered as an Unincorporated Partnership as the brothers are conducting Business Activities jointly, and have agreed to share Business profits and losses.
Example 3: Statement of intent
The brothers mentioned in the above examples formalise the agreement regarding the joint canteen through a written contract (though not incorporated/established under any federal or Emirate level laws). In the written contract, they include the statement that “there is no intention to create a partnership”. Such a statement by itself will not prevent their Business from being considered as an Unincorporated Partnership for the purpose of the Corporate Tax Law.
Example 4: Joint bank account
An account is opened in the joint names of a sole proprietor and their Business manager, for seamless execution of Business operations. This arrangement does not by itself create an Unincorporated Partnership.
Example 5: A husband and wife
A husband and wife agree to enter into a partnership with a food influencer and use their home to bake and sell cupcakes, with the intent of sharing the profits and losses based on each Person’s financial contributions, added value, and invested effort. Their agreement, even if only verbal, constitutes an Unincorporated Partnership as two (or more) Persons constitute a partnership if they jointly conduct Business.
Example 6: Public and private partnerships
An arrangement between a public sector entity (a government department) and a private sector company wherein the public sector entity awards a contract/project to the private sector company for a stipulated period would not, in itself, be considered to be an Unincorporated Partnership if none of the key elements of an Unincorporated Partnership are met.
Typically, the intention of such a contract is not to execute the project jointly. Instead, the public sector company engages/awards the project to a private sector company with the intention of encouraging private sector participation in economic and social development, utilising financial, technical, and technological potential/experience of the private sector, transferring knowledge from private to public sector, etc.
Typically, the private sector company implements, finances, owns, reaps the commercial benefits and operates a project for an agreed term after which the ownership of the project site is transferred back to the public sector entity.
Example 7: Consortium of companies or contractual joint venture
Company A and Company B collaborate to bid for a government project to construct and operate a national highway for 30 years. During this period, Company A and Company B sign an agreement to build the highway, share the profits, losses and management of the project equally.
After the stipulated tenure the project site is expected to be handed over to the government department. The consortium of companies/contractual joint venture (i.e. between Company A and Company B) would be treated as an Unincorporated Partnership.
On the other hand, if the project is conducted through a special purpose vehicle such as a Limited Liability Company in which Company A and Company B hold shares, the joint venture would not be an Unincorporated Partnership.
4. Unincorporated Partnerships for Corporate Tax
4.1. 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.
4.2. 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 nonresident 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.
4.3. Key features of an Unincorporated Partnership
4.3.1. Liability of the Unincorporated Partnership and its partners for Corporate Tax
An Unincorporated Partnership is the result of a contractual relationship between its partners. Thus, the Business of an Unincorporated Partnership and its owners or partners is considered to be the same, i.e. the partners are deemed to be conducting the Business of the Unincorporated Partnership and they remain jointly and severally liable for the Corporate Tax Payable for the Tax Periods when they are partners in the Unincorporated Partnership. 16
4.3.2. Partnership deed/agreement
A partnership arrangement is typically governed by a partnership deed or agreement which lays down the essential terms and conditions of the Business relationship of all the parties involved. This may cover initial contributions into the Business, distributive share or profit/loss sharing ratio, rights and obligations, terms of admission of new partner/s, exit process, interest payable on capital contributions, etc.
As discussed earlier, it is not necessary for the Unincorporated Partnership to have a formal written contract. Partners in an Unincorporated Partnership may opt to agree the terms of their Business relations verbally.
4.3.3. Distributive share of partners
Generally, the distributive share of partners is defined prior to the commencement of Business or during the course of Business of the Unincorporated Partnership by way of a partnership deed or agreement (see section 4.3.2).
Accordingly, the assets, liabilities, income and expenditure of the Unincorporated Partnership are allocated to each partner based on their agreed distributive share, depending on the agreement between the partners. 17
In case the distributive share of any partner in an Unincorporated Partnership cannot be identified (for example, due to a dispute between partners, addition of new partners or departure of existing partners), then the assets, liabilities, income and expenditure of the Unincorporated Partnership will be treated by FTA as allocated equally to each partner. 18
4.3.4. Capital contributions by partners
Typically, partners of a partnership will mutually agree the initial contribution from each partner. Partners who join at a later date may also provide a contribution.
The total capital contribution by a partner may include the amount that the partner has contributed to the partnership in cash or in kind (though not including any loans) but exclude amounts that the partner has drawn out or received, directly or indirectly.
Capital contributions by partners may take different forms. A partner may, by mutual agreement, contribute capital in the form of cash or in kind which may include real property, shares, securities, intellectual property, technical know-how, labour, etc.
It is not mandatory for all partners to contribute capital to the partnership or to contribute equal capital. The partners can agree on the contribution of each partner and the form of contribution.
4.3.5. Payments to partners
Partners may receive certain payments from the partnership such as interest on the amount of capital contributed or loan advanced to the partnership, salary for working partners, or payment for rendering services to the partnership (beyond the capacity of a partner).
The Corporate Tax considerations in relation to such payments are discussed in Section 5
4.3.6. Dissolution of partnership
Dissolution of a partnership is the winding up of the Business of the partnership, including disposing of all assets, discharging all liabilities and the settlement of accounts, etc.
Dissolution may be voluntary when it is mutually agreed by all partners or if the purpose for which the partnership was incorporated has been achieved, for example the completion of a project for which the partnership was established. Typically, a partnership may not be dissolved by the actions of fewer than all partners, unless such powers expressly exist in the partnership agreement, or this is permitted by the laws governing the partnership. If the reason is due to a dispute among the partners, the partnership interest of one or more partners may be purchased by the other partners instead of the dissolution of the partnership.
Dissolution may be compulsory in certain instances, for example due to the Business becoming insolvent or being specifically ordered by a court.
5. Unincorporated Partnerships and Corporate Tax
5.1. 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.1
5.1.1. Where a partner is a natural person
A natural person that is a partner in a fiscally transparent Unincorporated Partnership, will be subject to Corporate Tax in proportion to their distributive share if they fall within the scope of Corporate Tax.
The Corporate Tax Law treats partners in an Unincorporated Partnership as conducting the Business of that partnership. Thus, for a natural person, when considering if they fall within the scope of Corporate Tax, they must consider the nature of the Business or Business Activity conducted by the Unincorporated Partnership and whether it would constitute Personal Investment or Real Estate Investment. If so, the income from such activities is disregarded by the natural person as it falls outside of the scope of Corporate Tax. 20
In relation to any other Business or Business Activity conducted by the Unincorporated Partnership, the natural person must include their distributive share of the Turnover of such partnership with any other Turnover of such natural person to determine whether it exceeds AED 1 million in a Gregorian calendar year.
Turnover is defined as the gross amount of income (before adjusting for any expenses) derived during a Gregorian calendar year. 21 Therefore, the gross amount of income they receive from the Unincorporated Partnership is aggregated with all of their income from other Business or Business Activity conducted in the UAE when considering the AED 1 million threshold.
If their Turnover does not exceed AED 1 million, the natural person is not required to register for Corporate Tax purposes.22
In addition, and where all the relevant conditions are met, Small Business Relief may be available for Resident Persons where the Revenue threshold is not exceeded (currently AED 3 million, see Section 10).23 For a fiscally transparent Unincorporated Partnership, Small Business Relief will be considered for each of the partners separately.
5.1.2. Where a partner is a juridical person
5.1.2.1. Juridical person that is a Resident Person
A juridical person that is a Resident Person is subject to Corporate Tax in proportion to its distributive share in the fiscally transparent Unincorporated Partnership together with any other Business it conducts. However, whether or not it has a Corporate Tax liability will depend on multiple factors, including, whether it is eligible to make an election for Small Business Relief.
5.1.2.2. Juridical person that is a Non-Resident Person
A juridical person that is a Non-Resident Person is subject to Corporate Tax if it has a Permanent Establishment in the UAE24 or derives State Sourced Income25 or has a nexus in the UAE.26
Accordingly, a juridical person that is a Non-Resident Person will be subject to Corporate Tax on its distributive share in the fiscally transparent Unincorporated Partnership if the Unincorporated Partnership constitutes a Permanent Establishment in the UAE or nexus in the UAE. If not, the distributive share of that partner in the Unincorporated Partnership will be treated as State Sourced Income. 27
5.1.3. Mixed partnership
A mixed partnership is a partnership that has both natural persons and juridical persons as partners. An Unincorporated Partnership may have both as partners.
Example 8: A natural person forms an Unincorporated Partnership with a company
Mr A (a natural person residing in the UAE) and Company B (a company incorporated in and a tax resident of the UAE) form an Unincorporated Partnership with a distributive share of 10% and 90%, respectively.
The income from the Business conducted by the Unincorporated Partnership within the first Gregorian calendar year is AED 10 million.
- The Unincorporated Partnership is not subject to Corporate Tax
- The share of income for Mr A is AED 1 million (10% of AED 10 million).
- The share of income for Company B is AED 9 million (90% of AED 10 million).
Assume that Mr A’s distributive share of income is equal to his Turnover, and Mr A has no other income. Then, as the Turnover (AED 1 million) derived by Mr A from conducting the Business of the Unincorporated Partnership does not exceed AED 1 million within a Gregorian calendar year, Mr A is not subject to Corporate Tax and is not required to register for Corporate Tax purposes. 28.
Unlike natural persons, a juridical person that is a Taxable Person is required to register for Corporate Tax purposes irrespective of their Turnover. Accordingly, Company B will be required to register for Corporate Tax and will be subject to Corporate Tax. 90% of the income and expenditure of the Unincorporated Partnership is attributable to Company B and will be considered for the purpose of determining the Taxable Income of Company B.
Example 9: A natural person forms an Unincorporated Partnership with a company and has Turnover of more than AED 1 million.
Mr. A (a natural person residing in the UAE) and Company B (a company incorporated in and a tax resident of the UAE) form an Unincorporated Partnership with a distributive share of 20% and 80%, respectively.
The total income earned and expenditure incurred for the Business conducted by the Unincorporated Partnership for the 2025 Gregorian calendar year is as follows:
- Income: AED 10 million
- Expenditure: AED 6 million
The distributive share of each partner in relation to the above is as follows:
If the Unincorporated Partnership is treated as fiscally transparent, it is not subject to Corporate Tax. Instead, the partners are subject to Corporate Tax individually.
In this case, as the Turnover (i.e. AED 2,000,000) derived by Mr. A from conducting the Business of the Unincorporated Partnership exceeds AED 1 million, Mr. A will be subject to Corporate Tax and is required to register for Corporate Tax purposes.29
Unlike natural persons, a juridical person that is a Taxable Person is required to register for Corporate Tax purposes irrespective of their Turnover. Accordingly, Company B will be required to register for Corporate Tax and will be subject to Corporate Tax. 80% of the income and expenditure of the Unincorporated Partnership is attributable to Company B and will be considered for the purpose of determining the Taxable Income of Company B.
5.2. 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.
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
5.3. 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). 3
In addition:
- aIf 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.
- 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.
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.
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.
5.4. Income received by the Unincorporated Partnership and/or its partners
5.4.1. Investment income received by an Unincorporated Partnership and its partners
The Corporate Tax implications for the Unincorporated Partnership and its partners on receipt of income from investments, such as (a) Dividends or other profit distributions or (b) gains or losses on transfer, sale, or disposal of shares or ownership interest in another juridical person are as follows:
Example 10: Unincorporated Partnership claiming Participation Exemption
Mr A, Mr B and Mr C form an Unincorporated Partnership in the UAE that is active in the food and beverage industry. All three partners have made an equal contribution towards the capital and have agreed to share profits and losses equally.
The partners acquire, on behalf of the partnership, a 15% stake in Company Z (a company incorporated in and a tax resident of Country Z). Twelve months later, they receive Dividends from Company Z. A further twelve months later, they sell their shares in Company Z for a profit.
In this case, each partner is considered a Taxable Person conducting the Business of the partnership. Partners are treated as holding any assets that the partnership holds, allocated in accordance with their distributive share. 46 The Participation Exemption relief will be tested in the hands of the individual partners and not the Unincorporated Partnership since it is not a Taxable Person.
Accordingly, each partner is treated as holding 5% (1/3rd of 15%) of Company Z, thus meeting one of the requirements for the Participation Exemption (i.e. owning minimum 5% of the ownership interest in Company Z). If the other relevant Participation Exemption conditions are met, the partners can exclude their respective share of Dividends and capital gains or losses in respect of Company Z when determining their Taxable Income.4
Variation 2 – if Unincorporated Partnership is fiscally opaque (i.e. treated as a Taxable Person)
If the partners make an application to the FTA to treat the Unincorporated Partnership as a Taxable Person (and the same is approved), the Participation Exemption will be tested at the level of the Unincorporated Partnership and not the individual partners.
The partnership is treated as holding 15% of Company Z, thus meeting one of the requirements for the Participation Exemption (i.e. owning minimum 5% of the ownership interest in Company Z). If the other relevant Participation Exemption conditions are met, the partnership can exclude from its Taxable Income the Dividend received from Company Z and the gain or loss on disposal of shares of Company Z.4
5.4.2. Distribution of profits by Unincorporated Partnership to its partners
The Corporate Tax implications in relation to a share of profits received by the partners in an Unincorporated Partnership are as follows:
5.4.3. Transfer of partner’s distributive share in an Unincorporated Partnership
The Corporate Tax implications in relation to the gain or loss on transfer, sale or disposal of a partner’s distributive share in the Unincorporated Partnership are as follows:
Example 11: Tax implications for partners of a fiscally opaque Unincorporated Partnership
(A) In relation to profits distributed by the partnership to its partners:
Mr D and Ms E are partners in a fiscally opaque Unincorporated Partnership in the UAE with an equal distributive share in the partnership.
If Mr D and Ms E receive any profit distribution from the fiscally opaque Unincorporated Partnership, the partners can exclude such income while determining their Taxable Income on the basis that such income has already been subject to Corporate Tax at the level of the partnership.
In relation to gains or losses on sale or transfer or disposal of distributive share in the partnership:
If Mr D and Ms E decide to sell or transfer or dispose of their distributive share in the Unincorporated Partnership, any gain or loss from such disposal is excluded while determining their Taxable Income provided that the distributive share in the Unincorporated Partnership meets all the conditions of paragraphs (a) to (e) of Article 23(2) of the Corporate Tax Law.
5.5. 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.
5.5.1. Expenditure incurred for Business purposes
The general rule is that expenditure incurred wholly and exclusively for the purposes of a Business is deductible, provided such expenditure is not capital in nature.
If any expenditure is incurred for more than one purpose, i.e. it is not exclusively related to the Business, then only the portion that can be identified or reasonably allocated to the Business is allowed as a deduction for the purposes of calculating Taxable Income.
There are also specific rules that restrict or disallow the deductibility of certain types of expenditure. Non-deductible expenditure relevant to both fiscally transparent and fiscally opaque Unincorporated Partnerships, includes:
- Dividends, profit distributions or similar amounts paid to an owner of the Taxable Person; 56 and
- amounts withdrawn by a partner in an Unincorporated Partnership.
Accordingly, if any expenditure is incurred by an Unincorporated Partnership which constitutes a payment to or on behalf of a partner by an Unincorporated Partnership (i.e. not wholly and exclusively for the purposes of the Unincorporated Partnership’s Business), the same will not be allowed as a deduction while determining the Taxable Income of:
- the fiscally opaque Unincorporated Partnership as it would be treated as Dividends, profit distributions or similar amounts paid to an owner (i.e. the partners) of the Taxable Person (i.e. the opaque Unincorporated Partnership); 58 or
- the partners in a fiscally transparent Unincorporated Partnership, as the same would be treated as amounts withdrawn by the partner from the Business.
Example 12: Partial deduction of expenditure
Mr A, Mr B and Mr C are partners in a fiscally opaque Unincorporated Partnership in the UAE that is engaged in a pharmaceutical Business. The partners lease office premises from a third party with a storage facility attached. The lease rent for the Tax Period is AED 1 million.
The attached storage facility is not needed for the Business. It is intended to provide space to store personal items of Mr C (paintings and antiques bought as personal investments). The storage facility accounts for 5% of the total office space.
A question may arise whether the partnership can claim a deduction for the entire lease rent of AED 1 million for the Tax Period or should it be restricted to 95% (100% minus 5% used by Partner C for personal purposes).
In this case, given that 5% of the lease rental paid by the partnership does not relate to expenditure incurred wholly and exclusively for the purpose of the Business of the Unincorporated Partnership, that portion will not be allowed as deductible expenditure while determining the Taxable Income of the partnership.
5.5.2. Interest expenditure
Interest incurred for the purposes of a Taxable Person’s Business is allowed as a deduction, subject to the General and Specific Interest Deduction Limitation Rules
5.5.2.1. General Interest Deduction Limitation Rule
The Corporate Tax Law refers to the amount of Interest that is deductible as Net Interest Expenditure. Net Interest Expenditure is the difference between the amount of Interest expenditure incurred and the Interest income derived during a Tax Period
When the Net Interest Expenditure exceeds AED 12 million in a Tax Period, the amount of deductible Net Interest Expenditure is the greater of 30% of adjusted EBITDA (earnings before the deduction of Interest, tax, depreciation and amortisation) for a Tax Period, and the de minimis threshold of AED 12 million. 63 This is known as the “General Interest Deduction Limitation Rule”.
Any Net Interest Expenditure disallowed in a Tax Period by the General Interest Deduction Limitation Rule can be carried forward and utilised in the subsequent 10 Tax Periods in the order in which the amount was incurred, subject to the same conditions.64
The applicability of the General Interest Deduction Limitation Rule is tested in the hands of a Taxable Person. Whether the rules apply in the case of an Unincorporated Partnership will depend on its status for Corporate Tax purposes.
In the case of a fiscally transparent Unincorporated Partnership, the partners are treated as the Taxable Persons in relation to the partnership Business. Hence the applicability of the General Interest Deduction Limitation Rule will be tested in the hands of the individual partners.
- If the partner is a natural person, the General Interest Deduction Limitation Rule will not apply, considering the specific exclusion for natural persons conducting Business in the UAE.6
- If the partner is a juridical person, the General Interest Deduction Limitation Rule will apply (the 30% limitation will be applicable based on the adjusted EBITDA of the juridical person, not the partnership).
In the case of a fiscally opaque Unincorporated Partnership that is treated as a Taxable Person in its own right, the General Interest Deduction Limitation Rule will apply irrespective of who the partners are, i.e. natural persons or juridical persons. The 30% limitation will be applicable based on the adjusted EBITDA of the partnership.
5.5.2.2. Allocation of unutilised Net Interest Expenditure
Where a fiscally opaque Unincorporated Partnership has unutilised Net Interest Expenditure that has been carried forward to subsequent Tax Periods, it can be utilised only by the Unincorporated Partnership and not the partners. If any partner exits the partnership, no portion of the carried forward Net Interest Expenditure relating to the partnership will be allocated to the exiting partner.
5.5.2.3. Specific Interest Deduction Limitation Rule
No deduction is allowed for Interest expenditure incurred on a loan obtained, directly or indirectly, from a Related Party in respect of any of the following transactions:
- A Dividend or profit distribution to a Related Party.
- A redemption, repurchase, reduction or return of share capital to a Related Party.
- A capital contribution to a Related Party.
- The acquisition of an ownership interest in a Business that is, or becomes, a Related Party following the acquisition.
The purpose of this provision is to prevent the Corporate Tax base from being eroded by transactions or arrangements between Taxable Persons and their Related Parties for the sole or main purpose of creating deductible Interest expenditure where the income derived from the relevant transaction or arrangement can benefit from an exemption from Corporate Tax.
Whilst generally these deductions are not allowable for Corporate Tax purposes, the deduction restriction does not apply if the Taxable Person can demonstrate that the main purpose of obtaining the loan and carrying out the transaction is not to gain a Corporate Tax advantage.67 This will be based on the specific facts and circumstances applicable to each transaction. However, if it can be demonstrated that the Related Party receiving the Interest is subject to Corporate Tax or a similar tax in a foreign country at a rate of at least 9% on the Interest income, then no Corporate Tax advantage will be deemed to have arisen.6
In the context of an Unincorporated Partnership, the applicability of the Specific Interest Deduction Limitation Rule will be tested in the hands of the relevant Taxable Person:
- In the case of a fiscally transparent Unincorporated Partnership, the Specific Interest Deduction Limitation Rule will be tested in the hands of the partners.
- In the case of a fiscally opaque Unincorporated Partnership, the Specific Interest Deduction Limitation Rule will be tested in the hands of the partnership.
Thus, if either an Unincorporated Partnership or its partners receives a loan from its Related Party, the deductibility of Interest on such loan will be determined based on the Special Interest Deduction Limitation rule.
5.5.3. Interest paid to partners on their capital contribution
As noted above, the Net Interest Expenditure incurred for the purposes of a Taxable Person’s Business is allowed as a deduction subject to the General and Specific Interest Deduction Limitation Rules.
If an Unincorporated Partnership pays Interest to its partners on their capital contribution, the same shall be treated as an “allocation of income” or “profit distributions” to the partners for the purposes of the Corporate Tax Law. The Corporate Tax implications for the Unincorporated Partnership and the partners in relation to Interest paid on capital contributions is as follows:
5.5.4. Interest paid to partners on loan advanced by partners
As noted above, Interest expenditure incurred for the purposes of a Taxable Person’s Business is allowed as a deduction, subject to the General and Specific Interest Deduction Limitation Rules.
The Corporate Tax implications for the Unincorporated Partnership and the partners on Interest in relation to loans advanced by partners (i.e. not in relation to capital contributions) are as follows:
Example 13: Interest paid to a partner on loan from the partner
Mr A, Mr B and Mr C are partners in a fiscally transparent Unincorporated Partnership in the UAE. Each partner contributes equally towards their capital contribution. The partnership deed specifies that each partner will be eligible for interest at 4% on their respective capital contribution.
The partnership decides to expand its Business. However, it is unable to obtain a loan from the bank. Mr A agrees to lend money to the partnership for the expansion at market interest rates (i.e. as per arm’s length standard) in a personal capacity. No other partner makes a loan to the partnership.
Interest on capital contribution: As the payment of the Interest is treated as an allocation of income, each partner will be subject to Corporate Tax on any Interest received from the partnership in respect of its capital contribution. 75 Such interest expenditure would not be deductible in the determination of the Taxable Income of the respective partners.
Interest on loan advanced by Mr A: Interest received by Mr A from the partnership in respect of the loan advanced by Mr A would be included in the total income of Mr A when determining the Taxable Income of Mr A. However, such Interest expenditure should be deductible in the determination of Taxable Income for all the partners, including Mr A, as per their respective distributive share.
Note that for the purposes of this example, it is assumed that Mr A’s total Turnover from Business exceeds AED 1 million within a Gregorian calendar year. Mr A is, therefore, subject to Corporate Tax.
5.5.5. Interest expenditure incurred by partners to fund capital contributions
If a partner takes a loan in their individual capacity to fund their capital contributions in the Unincorporated Partnership Business and incurs Interest expenditure on the loan, such Interest expenditure will be deductible while determining the Taxable Income of the partner subject to the General and Special Interest Deduction Limitation Rules.
and the specific situation of the partner (natural person or juridical person)(refer Section 5.5.2).
5.5.6. Salary paid to partners in an Unincorporated Partnership
Partners normally receive a share of profit from the partnership. However, a partnership can also pay a salary to its partners if this is specifically provided for in the partnership deed or agreement.
The Corporate Tax implications for the Unincorporated Partnership and the partners in cases where the partnership decides to pay a salary to its partners are discussed below. Note this Section is relevant only where the partners are natural persons as a salary cannot be paid to a partner that is a juridical person.
Example 14: Treatment of salary received by natural persons in fiscally transparent Unincorporated Partnership
Mr A and Mr B are partners in a fiscally transparent Unincorporated Partnership with equal distributive shares in the Unincorporated Partnership.
During a Tax Period, the income and expenditure of the Unincorporated Partnership is AED 75,000,000 and AED 65,000,000, respectively. The expenditure includes salary paid to Mr A of AED 10,000,000 and to Mr B of AED 15,000,000 in the Tax Period.
The Unincorporated Partnership is fiscally transparent and hence the partners will be subject to Corporate Tax on their distributive share of income and expenditure. However, the salaries of the partners will not be considered as deductible expenditure while determining the Taxable Income of the partners as the same will be treated as an amount withdrawn from the Business. 8
5.5.7. Payment to partners for services provided to an Unincorporated Partnership
During the course of conducting Business, partners may render services to the Unincorporated Partnership (other than as an employee). The Corporate Tax implications for the Unincorporated Partnership and the partners in relation to the provision of services are as follows:
Example 15: Rent paid to a partner by fiscally opaque Unincorporated Partnership
A fiscally opaque Unincorporated Partnership requires an office space to conduct its Business. Mr A who is a partner in the partnership, has a property which he is willing to rent to the Unincorporated Partnership.
The property provided to the Unincorporated Partnership is not in the nature of a capital contribution of Mr A.
Any rent paid by the Unincorporated Partnership to Mr A should be allowable as a deduction in determining the Taxable Income of the Unincorporated Partnership, as long as the partnership would in any event have paid an equivalent rent for an equivalent property to a third party, if not renting from Mr A, i.e. if the rent meets the arm’s length standard.
The rental income earned by Mr A will typically be Real Estate Investment income and, therefore, not be subject to Corporate Tax (assuming that Mr A does not conduct a rental Business under a Licence and does not require a Licence).
5.5.8. Reimbursements of expenditure to partners
Partners may incur certain expenditure on behalf of the Unincorporated Partnership. Such expenses may then be reimbursed by the Unincorporated Partnership in whole or in part.
The Corporate Tax implications for the Unincorporated Partnership and the partners on such reimbursement of Business expenditure are as follows:
5.6. 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:
(a) 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.
(b) 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.
Example 16: Change in ownership interest of fiscally opaque Unincorporated Partnership and impact on carry forward of Tax Loss
Partnership D is a fiscally opaque Unincorporated Partnership with three partners: Mr A, Mr B and Mr C. Its Business is manufacturing clothes in the UAE. Each partner holds an equal distributive share in the partnership.
Partnership D incurs a Tax Loss in both the 2024 and 2025 Gregorian calendar years, while Mr A, Mr B and Mr C are the only partners. The Tax Loss is not utilised entirely in those years.
During the 2026 Gregorian calendar year, Mr B and Mr C (representing a 2/3rd distributive share in the partnership) decide to leave the partnership. In their place, Mr K and Mr L join the partnership, acquiring the distributive share of the departing partners. The partnership continues the same Business of manufacturing clothes.
In this case, even though more than 50% of the ownership interest of the fiscally opaque Unincorporated Partnership has changed, it can continue to use and/or carry forward the remainder of the Tax Loss generated in 2024 and 2025 since its Business continues to be the same.
5.7. 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.
Example 17: Foreign Tax Credit in case of Unincorporated Partnership
Company A and Company B are partners in a fiscally transparent Unincorporated Partnership. Both companies are incorporated in and are residents of the UAE with a distributive share of 40% and 60%, respectively.
During the relevant Tax Period, net income of the Unincorporated Partnership is AED 5 million out of which foreign source income is AED 2 million arising from Country X. The foreign tax paid in Country X in respect of this foreign source income was the equivalent of AED 200,000.
The Corporate Tax Payable by the partners Company A and Company B on the income of the Unincorporated Partnership shall be as follows. Note that neither partner is eligible for Small Business Relief.
Application to be treated as Taxable Person
6.1. 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.
- 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.
6.2. 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:
- 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.
6.3. 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.
6.4. 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.
Example 18: An Unincorporated Partnership splits into two Unincorporated Partnerships
Partnership A is a fiscally transparent Unincorporated Partnership between 5 natural persons (Mr K, Mr E, Mr N, Mr D and Mr L) with an equal distributive share in the partnership. The FTA approved the application made by the partners to treat Partnership A as a Taxable Person, i.e. fiscally opaque.
Partnership A has registered for Corporate Tax purposes and been issued with a Tax Registration Number
However, due to an internal dispute, Mr D, Mr E and Mr L decide to exit the partnership and establish a new Unincorporated Partnership (Partnership B). Mr K and Mr N continue to be the partners of Partnership A.
Merely because some partners left the partnership does not mean that Partnership A has the choice to be treated as fiscally transparent. Partnership A will continue to be treated as a Taxable Person until it ceases to exist. Additionally, it will have to notify the FTA regarding the partners (Mr D, Mr E and Mr L) that have left Partnership A within 20 business days.
Since Partnership B is a new and separate Unincorporated Partnership, it will be treated as fiscally transparent unless the partners (Mr D, Mr E and Mr L) make an application to the FTA to treat Partnership B as a Taxable Person, i.e. fiscally opaque.
Regardless of whether it applies to be a separate Taxable Person or not, Partnership B will have to register for Corporate Tax purposes and obtain a Tax Registration Number.
6.5. 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.
Example 19: Partners of a fiscally transparent Unincorporated Partnership, following different methods of accounting, make an application to treat the Unincorporated Partnership as a Taxable Person, i.e. fiscally opaque
Company P (a company incorporated in and tax resident of the UAE) and Ms Q (a natural person residing in the UAE) are partners in a fiscally transparent Unincorporated Partnership with distributive shares of 80% and 20%, respectively.
Facts:
- Both partners and the partnership apply the Gregorian calendar year as their Tax Period.
- Company P applies the Accrual Basis of Accounting.
- Ms Q applies the Cash Basis of Accounting (as her Turnover does not exceed AED 3 million) but has not elected for Small Business Relief.
- The Unincorporated Partnership applies the Accrual Basis of Accounting.
Chronology of events:
- On 1 December 2024, the partnership earned income of AED 10 million from sale of goods (assuming no offsetting costs/expenditure).
- On 15 December 2024, the FTA approved the partnership to be treated as a Taxable Person from 1 January 2025 onwards.
- On 25 January 2025, payment was received for the sale of the goods.
The Corporate Tax implications in the hands of Company P, Ms Q and the Unincorporated Partnership for the 2024 Tax Period are as follows (assuming there is no other income):
- The Unincorporated Partnership is fiscally transparent. Hence it is not treated as a Taxable Person for Corporate Tax purposes. The partners (Company P and Ms Q) will be treated as Taxable Persons, individually, in relation to their respective distributive shares in the partnership.
- Company P’s distributive share of income is AED 8 million (i.e. 80% of AED 10 million). As Company P applies the Accrual Basis of Accounting, AED 8 million is accrued to Company P (even though payment is not received) and, hence, the same will be subject to Corporate Tax for the 2024 Tax Period.
- Ms Q’s distributive share of income is AED 2 million (i.e. 20% of AED 10 million). However, as Ms Q applies the Cash Basis of Accounting, in the absence of the actual receipt of income during the 2024 Tax Period, no income is recognised by Ms Q in the 2024 Tax Period. Hence, she will not be subject to Corporate Tax on the AED 2 million in the same Tax Period.
The Corporate Tax implications in the hands of Company P, Ms Q and the Unincorporated Partnership for the 2025 Tax Period are as follows (assuming there is no other income):
- For the 2025 Tax Period the partnership is treated as a Taxable Person, i.e. when it is fiscally opaque.
- Company P will not be subject to Corporate Tax in relation to the partnership Business. It will continue to remain a Taxable Person in relation to any Business income other than the partnership Business.
- However, Ms Q, though not subject to Corporate Tax in relation to the partnership Business, will be required to recognise the AED 2 million for Corporate Tax purposes as the same is paid in the 2025 Gregorian calendar year and pertains to a Tax Period where the partnership was not a Taxable Person.
- The fiscally opaque Unincorporated Partnership: Even though the partnership receives payment of AED 10 million, this income has not “accrued” to the partnership in the 2025 Gregorian calendar year (as it applies Accrual Basis of Accounting). It was accrued in the prior period (when the partnership was not treated as a Taxable Person). Hence, no Corporate Tax is payable by the partnership on the receipt of AED 10 million.