Understanding the Tax Treatment of Unincorporated Partnerships under UAE Corporate Tax Law (Part 2)

In light of the UAE’s introduction of Corporate Tax under Federal Decree-Law No. 47 of 2022, businesses and partnerships are now subject to a more structured tax regime. This article delves into the treatment of foreign partnerships, particularly unincorporated foreign partnerships, and outlines the key considerations for tax compliance under the new law.

Foreign Partnerships under UAE Corporate Tax Law

The treatment of foreign partnerships, particularly those that are unincorporated, is addressed under Article 16, Clause 7 of the Corporate Tax Law. Specifically, two key points should be noted:

1. No Corporate Tax Equivalent in Foreign Jurisdictions
   According to Paragraph (a) of Clause (7) of Article (16), foreign partnerships will not be subject to any tax in their home jurisdiction that is similar to the UAE’s Corporate Tax. This provision ensures that foreign partnerships that are not taxed in their jurisdiction similarly to a corporation will not face additional tax obligations under UAE laws, provided they meet the stipulated conditions.
2. Tax Obligations for Partners in the Foreign Partnership
   Paragraph (b) of Clause (7) of Article (16) clarifies that if the foreign partnership is not subject to tax in its own right, each individual partner in the foreign partnership will be required to pay tax based on their distributive share of the partnership’s income. In simple terms, the income from the partnership will pass through to the partners, who will then be taxed on their share of the partnership’s profits.
3. Annual Declaration Requirement
   To ensure compliance, foreign partnerships must submit an annual declaration to the UAE Authority. This declaration will confirm that the partnership adheres to the criteria set forth in Paragraphs (a) and (b) of Clause (7) of Article (16). The specific form, manner, and timeline for this declaration will be prescribed by the UAE Authority, ensuring a streamlined process for reporting and maintaining compliance.

Impact of Ministerial Decision No. 261 of 2024

Ministerial Decision No. 261 of 2024, issued on October 28, 2024, provides further clarity on the regulations surrounding the treatment of foreign partnerships, family foundations, and unincorporated partnerships. This decision ensures that businesses can more easily navigate the tax landscape and maintain compliance with the Corporate Tax Law, particularly in relation to foreign partnerships that may have complex international structures.

What Foreign Partnerships Need to Know

For foreign partnerships operating within the UAE, it is crucial to understand that the new law aligns with global tax practices by considering the income distribution and tax obligations of each partner individually. To avoid any issues with tax authorities, partnerships should:

• Assess Taxability: Ensure that their home jurisdiction does not impose a tax that resembles corporate tax.
• Distributive Share: Understand that income will be taxed at the partner level, based on each individual’s share of the foreign partnership’s income.
• Timely Filings: Submit the required annual declaration to confirm compliance with the UAE’s Corporate Tax Law.

Conclusion

The UAE’s Corporate Tax regime is a significant development for foreign businesses and partnerships. For unincorporated foreign partnerships, the law emphasizes tax transparency, holding individual partners accountable for their share of the partnership’s income. It is vital for businesses to be proactive in understanding and meeting the requirements outlined in Federal Decree-Law No. 47 of 2022 and Ministerial Decision No. 261 of 2024 to ensure seamless compliance.

By staying informed and adhering to these guidelines, foreign partnerships can confidently operate within the UAE, avoiding unnecessary tax liabilities while contributing to the country’s growing business landscape.

summary

The UAE Corporate Tax Law, under Federal Decree-Law No. 47 of 2022, outlines specific provisions for the treatment of unincorporated foreign partnerships. Such partnerships are not subject to UAE Corporate Tax if they are not taxed similarly in their home jurisdiction. Instead, tax obligations are passed on to individual partners based on their distributive share of the partnership’s income. Additionally, foreign partnerships must file an annual declaration to confirm compliance. Ministerial Decision No. 261 of 2024 further clarifies these requirements, ensuring partnerships navigate the tax framework effectively and maintain compliance.

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