As per the Corporate Tax Guide | CTGPTN1, issued by FTA in March 2024, Generally speaking, a partnership is an agreement, relationship, or contract between two or more people to conduct business together and split the company’s gains and losses. A partnership may be unincorporated or incorporated in the context of the United Arab Emirates.
An incorporated partnership has a separate legal identity from its partners, whereas an unincorporated partnership does not. This is the main difference between the two. Legal entities for the purposes of the Corporate Tax Law are incorporated partnerships.
Incorporated Partnerships
The laws under which an entity is incorporated, founded, or set up determine whether it is regarded as an incorporated partnership, that is, a juridical person having a distinct legal personality.
The following is an example list of entities that are deemed to be incorporated partnerships and, as a result, recognized as juridical persons under the Corporate Tax Code, based on applicable legislation.
- Joint Liability Company
- Limited Partnership Company
- Civil Company
- General Partnership
- Limited Liability Partnership
- Limited Partnership
Unincorporated Partnerships
An unincorporated partnership is defined under the Corporate Tax Law as a relationship formed by contract between two or more Persons. This can involve operating a business or undertaking and splitting the gains and losses; examples of these structures include partnerships, trusts, joint ventures, consortiums, associations of people, etc. The agreement may be in writing or verbally. The term “contractual relationship” in the definition of an unincorporated partnership refers to the legal relationship that exists between the unincorporated partnership’s business and its owners.
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.
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
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
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.
IT MEANS THAT IF THE PARTNERSHIP IS REGISTERED AS TAXABLE PERSON WITH FTA, THEN THE PARTNERSHIP WILL NOT BE TREATED AS FISCALLY TRANSPARENT (WHICH MEANS PARTNERS ARE RESPONSIBLE FOR INCOME FROM PARTNERSHIP AND THE CORPORATE TAX IS LEVIED ON PARTNERS) BUT IT WILL BE FISCALLY OPAQUE.
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.
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.