Comparing Tax Treatment of Incorporated and Unincorporated Partnerships in UAE

Introduction:

Federal Decree-Law No. 47/2022 on the Taxation of Corporations and Businesses (Corporate Tax Law) was implemented on 3 October 2022.Under UAE corporate tax laws, partnerships can be classified as either incorporated or unincorporated, each with its own set of tax implications.

Understanding the differences between these two types of partnerships is crucial for navigating the corporate tax landscape in the UAE. In this article, we’ll explore the treatment of incorporated partnerships compared to unincorporated partnerships under UAE corporate tax laws.

Incorporated Partnerships: Incorporated partnerships refer to those that have a separate legal personality distinct from their partners. In the UAE, this typically includes entities such as limited liability companies (LLCs) and joint-stock companies. Here’s how incorporated partnerships are treated under UAE corporate tax laws:

• • Taxable Person Status: Under UAE corporate tax laws, incorporated partnerships are considered taxable persons in their own right. They are subject to corporate tax on their profits at the applicable corporate tax rate.
  • Tax Filing and Compliance: Incorporated partnerships are mandated to file corporate tax returns and adhere to all relevant tax regulations. They are obliged to maintain accurate accounting records and provide financial statements to the tax authorities for scrutiny.
  • Taxable Income and Deductions: Taxable income for incorporated partnerships is determined based on their financial statements. They are entitled to deductions for business expenditures incurred solely and exclusively for income generation, subject to specified restrictions and limitations.
  • Tax Loss Relief: Incorporated partnerships retain the ability to carry forward tax losses for offsetting against future taxable income, subject to certain conditions. These losses incurred by an incorporated partnership are not directly passed on to the partners but are instead carried forward by the entity itself.

Unincorporated Partnerships: Unincorporated partnerships, on the other hand, do not have a separate legal personality from their partners. Unincorporated partnerships, include general partnerships and limited partnerships. Here’s how they are treated under UAE corporate tax laws:

• • Fiscally Transparent Status: Unincorporated partnerships are typically treated as fiscally transparent status for tax purposes. This means that partnership profits and losses flow through to the partners, who are individually liable for tax on their respective shares of partnership income.
  • Taxation of Partners: Partners in unincorporated partnerships are subject to taxation on their distributive share of partnership income, irrespective of whether such income is distributed or retained by the partnership.
  • Tax Filing and Compliance: While unincorporated partnerships themselves do not file corporate tax returns; partners are required to declare their portion of partnership income on their individual tax returns.
  • Tax Deductions and Losses: Partners in unincorporated partnerships may be eligible to deduct their share of partnership expenses incurred for business purposes. Additionally, they can carry forward their share of partnership losses to offset against future taxable income, subject to certain limitations.

Conclusion:

The treatment of incorporated partnerships and unincorporated partnerships under UAE corporate tax laws differs primarily in terms of their legal status, taxation, and compliance requirements. Understanding these distinctions is essential for partners and businesses operating within the UAE to ensure compliance with applicable tax regulations and enhance their tax position.