 What is a partnership?
A partnership is normally an arrangement, relationship or contract between multiple persons to conduct business together and to share the profits and losses.

 Incorporated partnerships
Whether an entity is considered to be an incorporated partnership i.e. juridical person with a separate legal personality depends on the legislation under which it is incorporated,
established or set up.

Based on the relevant legislation, the following is an illustrative list of entities
Considered incorporated partnerships and treated as judicial persons under the Corporate Tax law

• Joint Liability Company
• Limited Partnership Company
• Civil Company
• General Partnership
• Limited Liability Partnership
• Limited Partnership

 Unincorporated Partnerships

The Corporate Tax Law defines an Unincorporated Partnership as a relationship
formed by an agreement between two or more parties, in compliance with the
applicable legislation of the UAE.

 Unincorporated Partnerships for Corporate Tax

As previously mentioned, an Unincorporated Partnership is defined by the Corporate Tax Law as a relationship created by contract between two or more people, such as a partnership, trust, or any other comparable organisation of people, in compliance with the applicable legislation of the UAE.

As per the Corporate Tax Law, the default position is that an Unincorporated
Partnership is not considered a Taxable Person on its own. 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”.

 Key features of an Unincorporated Partnership:

Liability of the Unincorporated Partnership and its partners for Corporate Tax

 Partnership deed/agreement
A partnership deed or agreement, which establishes the fundamental terms and conditions of the business connection of all parties, usually governs a partnership arrangement the parties involved.

 Distributive share of partners
Generally, the distributive share of partners is defined prior to the commencement of Business or during Business of the Unincorporated Partnership via a partnership deed or agreement

 Capital contributions by partners
Typically, partners of a partnership will mutually agree on the initial contribution from each
partner. Partners who join at a later date may also provide a contribution.

 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

 Dissolution of partnership
Dissolution of a partnership is the winding up of the Business of the partnership, including disposing of all assets, discharging liabilities and settlement of accounts, etc.

 Unincorporated Partnerships and Corporate Tax:

Unincorporated Partnerships are treated as fiscally transparent:
The default position in the Corporate Tax Law is that an Unincorporated Partnership
is treated as fiscally transparent, i.e. 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
proportionate portion of the Unincorporated’s income, expenses, liabilities, and assets
Partnership.

 Where a partner is a natural person
A natural person who 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.

 Where a partner is a juridical 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.

 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.

 Mixed partnership
A mixed partnership is a partnership that has both natural persons and juridical persons as partners. An Unincorporated Partnership might have both as partners.

 Unincorporated Partnerships treated as fiscally opaque
An unincorporated partnership’s partners may choose to apply to the FTA to have the unincorporated partnership recognised as a Taxable Person, i.e. fiscally opaque.
If the FTA approves the application, the Unincorporated Partnership will be
treated as a Taxable Person.

 Determining the Taxable Income of an Unincorporated Partnership

The partners of an Unincorporated Partnership are the Taxable Persons with respect to
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 Small and Medium Enterprises

In addition:

• If partners are treated as Taxable Persons (in the case of a fiscally transparent
  Unincorporated Partnership), each partner needs 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

1. Income received by the Unincorporated Partnership and/or its partners
2. Income from investments made by the Unincorporated Partnership
3. Fiscally Transparent Unincorporated Partnership:

If the partner is a juridical person: Income in the nature of Dividends or other profit distributions from a juridical person will directly pass through to the partners in proportion to each partner’s distributive share and will be subject to Corporate Tax in the hands of each individual partner.
Such income will be exempt from Corporate Tax in the hands of the partners if: (a) it is received from a juridical person who is a Resident Person (without any conditions) 36 or (b) it is received from a Participating Interest in a foreign juridical person.
Income in the nature of gains or losses on the transfer, sale or disposal of shares of a UAE or foreign juridical person will also pass through to the partners and will be dealt with for Corporate Tax in the hands of the individual partners. Such income will be exempt from Corporate Tax in the hands of the partners if received from a Participating Interest.
If the partner is a natural person: In the case of partners that are natural persons, Dividends or other profit distributions (from a foreign juridical person) and gains or losses on the transfer, sale or disposal of shares (of a UAE or foreign juridical person) will be treated as Personal Investment income.
Dividends or other profit distributions from a Resident Person will remain exempt from Corporate Tax without any conditions.

 Fiscally opaque Unincorporated Partnership:
Any income received by a fiscally opaque Unincorporated Partnership will be treated for Corporate Tax purposes as income in the hands of the partnership and not in the hands of the individual partners. Income in the nature of Dividends or other profit distributions from a juridical person will be exempt from Corporate Tax in the hands of the partnership if: (a) it is received from a juridical person who is a Resident Person (without any conditions) or (b) it is received from a Participating Interest in a foreign juridical person.
Gains or losses resulting from the transfer, sale, or dispose of shares of a foreign legal entity or the United Arab Emirates will likewise be handled for corporate tax purposes at the partnership level. Such income will be exempt from Corporate Tax in the hands of the partnership if received from a Participating Interest

 Distribution of profits by Unincorporated Partnership:

Share of profits in the partnership received by the partners:

Fiscally Transparent Unincorporated Partnership:
Income from the Business of the Unincorporated Partnership is subject to Corporate Tax in the hands of the partners in accordance with their distributive share taking into consideration whether the partner is a natural person or a juridical person.

Fiscally opaque Unincorporated Partnership:
Any income received by a partner (natural or juridical person) will not be considered when determining the Taxable Income in the hands of the partners, on the basis that the income is already taken into account in the determination of the Taxable Income of the fiscally opaque Unincorporated Partnership.

 Transfer of partner’s distributive share in an Unincorporated Partnership:

Gain or loss on transfer, sale or disposal of partner’s distributive share in the partnership:

 Fiscally Transparent Unincorporated Partnership:

The partners are deemed to be conducting the Business of the Unincorporated Partnership. The Unincorporated Partnership does not have a separate legal personality distinct from its partners. Hence any gain or loss on transfer, sale or other disposal of a partner’s distributive share in the Unincorporated Partnership will be treated as Business income, subject to Corporate Tax in the hands of the partners.

 Fiscally opaque Unincorporated Partnership:

Any gain or loss on transfer, sale, or other disposal of a partner’s distributive share in the Unincorporated Partnership, or part thereof, is not subject to Corporate Tax in the hands of the partners, provided that the distributive share meets all the conditions of paragraphs (a) to (e) of Article 23(2) of the Corporate Tax Law (the Participation Exemption)

 Deductible expenditure:

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. 54 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.

 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.

 General Interest Deduction Limitation Rule:

When the Net Interest Expenditure exceeds AED 12 million in a Tax Period, the amount of deductible Net Interest Expenditure is greater than 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. This is known as the “General Interest Deduction Limitation Rule”.

In the case of a fiscally transparent Unincorporated Partnership, the partners are treated as the Taxable Persons in relation to the partnership Business.

• 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.
• 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).

 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.

 Interest paid to partners on their capital contribution:

Interest paid to partners on their capital contribution by the Unincorporated Partnership:

 Fiscally Transparent Unincorporated Partnership:

 Implications for the Unincorporated Partnership:
Not applicable as the fiscally transparent Unincorporated Partnership is not treated as a Taxable Person. Implications for the partners: Interest paid by a fiscally transparent Unincorporated Partnership to its partners on their capital account is treated as an allocation of income to the partner. Therefore, it is not considered as deductible expenditure when calculating the Taxable Income of the partners in relation to the Unincorporated Partnership Business.

 Fiscally opaque Unincorporated Partnership:

Implications for the Unincorporated Partnership:
Interest paid by a fiscally opaque Unincorporated Partnership to its partners on their capital contribution is treated as a profit distribution or benefit of a similar nature. Hence it will not be allowed as a deduction in determining the Taxable Income of the fiscally opaque Unincorporated Partnership.
Implications for the partners:
Interest on capital contribution received by partners in a fiscally opaque Unincorporated Partnership will be excluded from the Taxable Income of the partners on the basis that such income has already been subject to Corporate Tax at the level of the partnership.

 Interest paid to partners on loan advanced by partners:

 Fiscally Transparent Unincorporated Partnership:
Implication for the Unincorporated Partnership: Not applicable as the fiscally transparent Unincorporated Partnership is not treated as a Taxable Person. Implication for the partners: If the Unincorporated Partnership obtains a loan from any of the partners wholly and exclusively for the purposes of the Business, and Interest paid on such loans is at arm’s length, the Interest expenditure will be deductible while determining the Taxable Income of the partners to the extent of their distributive share

 Fiscally opaque Unincorporated Partnership:
Interest paid by a fiscally opaque Unincorporated Partnership to its partners on loans advanced by the partners will be deductible while determining the Taxable Income of the partnership if the Interest paid on the loans was incurred wholly and exclusively for the purposes of the Business of the partnership and is at arm’s length.

Tax Loss Relief and limitation on Tax Loss carry forward
The Corporate Tax Law allows a Taxable Person to reduce their Taxable Income by offsetting part of the Tax Loss accumulated in previous years. However, a Taxable Person cannot claim Tax Loss relief for:

• 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

 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.

 Other Corporate Tax consequences of being treated as a Taxable Person:

• The transfer is done by 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 same Financial Year,
• The partners and the partnership prepare the Financial Statements with the
  same Accounting Standards
• The transfer is undertaken for valid commercial or other reasons which
  reflect economic reality.

 Implications of partners following different methods of accounting:

If partners in a fiscally transparent Unincorporated Partnership follow separate methods of accounting, like accrual basis versus cash basis, and make an application for the Unincorporated Partnership to be treated as a Taxable Person, 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.

 Corporate Tax compliance obligations:

 Fiscally Transparent Unincorporated Partnership:

Individual partners of a fiscally transparent Unincorporated Partnership must determine their Corporate Tax obligations in relation to their individual distributive share in the Unincorporated Partnership. Whether a partner is required to register for Corporate Tax purposes and file a Tax Return will depend on their individual circumstances

 Fiscally opaque Unincorporated Partnership:
An application to treat an unincorporated partnership as a taxable person may be submitted by the partners to the FTA. i.e. fiscally opaque. If the application is approved, the Unincorporated Partnership will be subject to Corporate Tax as a Taxable Person and its Tax Registration Number will be changed from an inactive number to an active number.

 Tax Returns:

Fiscally Transparent Unincorporated Partnership
If an Unincorporated Partnership is treated as fiscally transparent, it is not required to file a Tax Return. The partners of the Unincorporated Partnership are required to file their individual Tax returns for their distributive share in the Unincorporated Partnership by the normal deadline of 9 months from the end of the relevant Tax Period.

Fiscally opaque Unincorporated Partnership:
If a partnership that is not incorporated is regarded as a taxable entity, i.e. fiscally opaque, it is required to file its Tax Return by the normal deadline of 9 months from the end of the relevant Tax Period.

Financial Statements

The Financial Statements used to calculate the Taxable Income for a specific Tax Period may be requested by the FTA from any Taxable Person in the format, manner, and within the the timeline prescribed by the FTA.

Tax treatment of Foreign Partnerships:
Conditions to be treated as an Unincorporated Partnership:
The Foreign Partnership is not subject to tax under the laws of the foreign jurisdiction where it is established.
Each partner in the Foreign Partnership is individually subject to tax on their distributive share of any income of the Foreign Partnership as and when the income is received by or accrued to the Foreign Partnership.
The Foreign Partnership submits an annual declaration to the FTA to confirm that it has met the conditions (a) and (b) listed above.

Foreign Partnership not considered as an Unincorporated Partnership:

If a Foreign Partnership does not meet the conditions specified in Section 8.2, then it
will be regarded as a fiscally opaque entity for Corporate Tax purposes and will be
subject to Corporate Tax in the UAE on the same basis as a Non-Resident Taxable
Person if it has a Permanent Establishment or nexus in the UAE.

 Interaction with Free Zone Persons:

Is there a Free Zone Person in a partnership?
A juridical entity formed, established, or otherwise registered under the laws and regulations of a free zone is referred to as a “free zone person.” This includes branches of foreign or UAE juridical persons that are registered in free zones.

Can a person who is in a free zone join an unincorporated partnership as a partner?

A partner in an Unincorporated Partnership can be either a natural or juridical person.
A Free Zone Person is a juridical person and can be a partner in an Unincorporated Partnership.

Branch of Unincorporated Partnership in a Free Zone
As noted above, a Free Zone Person is a juridical person incorporated, established or
otherwise registered under the rules and regulations of a Free Zone, including a
branch of a legal entity registered in a free zone, either foreign or UAE.

Interplay with Small Business Relief:

A corporate tax relief known as “small business relief” permits qualified taxpayers to be regarded as having no taxable income for the applicable tax period. A Taxable Person
that is a Resident Person and whose Revenue in the current and previous Tax Periods
does not exceed AED 3 million can claim Small Business Relief.

Unincorporated Partnership and Business events:

An Unincorporated Partnership is a business association formed by agreement between two or more individuals who manage the partnership’s business jointly and agree to divide its assets. liabilities, income and expenditure of the Unincorporated Partnership in proportion to their distributive share in that Unincorporated Partnership.

A partner’s distributive share is a representation of each partner’s proportionate rights and obligations in respect of the assets, liabilities, income and expenditure of the Unincorporated Partnership.

Consideration for transfer or sale
For a partner joining or leaving an Unincorporated Partnership, or a change in
distributive share, if the partners are connected parties, then any payment
exchanged for the partners’ distributive share must meet the arm’s length standard.

Cost of acquisition of distributive share
The cost of acquisition of a distributive share is generally the expenditure incurred by the partner in acquiring their distributive share, which can be incurred in cash or in kind.

Transfer of the Unincorporated Partnership’s Business
A partnership may transfer its entire Business or an independent part of its Business
to a third party, and in consideration can receive cash or shares in a juridical person.

When a partner leaves or retires from an Unincorporated Partnership, they no longer carry on the Business and retain their distributive share in the Unincorporated Partnership, even though the Business may be continued by other partners. This includes the treatment of income or expenditure for a fiscally transparent Unincorporated Partnership.

Treatment of Corporate Tax Payable post the departure of a partner:
In the case of a fiscally transparent Unincorporated Partnership, Corporate Tax is not paid at the level of the Unincorporated Partnership. Instead, the partners are subject to Corporate Tax individually on their respective distributive share of assets, liabilities, income and expenditure.

Transactions with Related Persons and Connected Parties:

The Corporate Tax Law contains transfer pricing rules to ensure that the value of a transaction is not distorted by the relationship between the parties involved.

 General Anti-Abuse Rule
The FTA is able to reverse or modify any transaction under the General Anti-Abuse Rule
(or any part thereof) which lacks commercial substance or does not
represent the realities of the economy and are carried out primarily for, or in situations where one of the main purpose is, obtaining a Corporate Tax advantage that in keeping with the Corporate Tax Law’s aim.