The Federal Corporate Tax Law in the UAE applies to any taxable business within UAE at a 9% rate on any net profit exceeding AED 375,000 annually. We have discussed in a previous post how Corporate Tax is going to be calculated for different businesses.
However, when it comes to business partnerships, the implementation of Corporate Tax may differ based on the nature of the partnership. So, in this post we will be discussing how Corporate Tax applies to both incorporated and unincorporated business partnerships in the UAE.
How UAE Corporate Tax will apply to incorporated business partnerships.
Incorporated partnerships are business partnerships where the parties involved have limited liability towards the partnership’s obligations and debts. Incorporated business partnerships will be treated as a corporate entity or a separate legal entity. Any activity of corporate entities is viewed as business activity and is therefore subject to Corporate Tax unless this activity has been specifically exempted.
How UAE Corporate Tax will apply to unincorporated business partnerships.
To understand how UAE Corporate Tax will apply to unincorporated business partnerships, we first have to understand what an unincorporated partnership is in the eyes of the UAE Government. An Unincorporated business partnership is a contractual agreement between two or more parties that does not represent a separate legal entity from the parties involved.
Since the unincorporated business partnership does not represent a separate legal entity, all the parties involved in the partnership will be taxed individually. Each party in the business partnership will have to file their taxes separately and will be subject to Corporate Tax on any taxable income in respect to his or her shares within the partnership. As such, UAE Corporate Tax will apply to unincorporated business partnerships and the parties involved in the following manner:
- Tax-deductible expenditure may be allowed for expenses incurred by the partner while conducting business activity related to the unincorporated partnership.
- Tax-deductible expenditure may be allowed for Interest expenses incurred by the partner in respect to any contributions made to the capital of the unincorporated partnership.
- Any interest paid by the unincorporated partnership to one of the partners will be treated as an allocation of income to the partner. Therefore, it will NOT be considered as a tax-deductible expenditure.
- Any foreign tax the unincorporated partnership is subject to will be allocated as foreign tax credit to each partner in respect to their share in the partnership.
NOTE: Foreign Partnerships will be treated as unincorporated it in regard to UAE Corporate Tax implementation.
The parties in an unincorporated partnership can nominate their partnership to be treated as a taxable business by submitting an application to the FTA, in which case one of the partners will represent the unincorporated partnership during any proceedings or obligations related the Federal Corporate Tax Law.
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