What is the new UAE tax option for unincorporated partnerships?

The UAE's Ministry of Finance on Saturday issued a Cabinet decision to introduce an option for tax treatment for unincorporated partnerships.

The federal Decree-Law No (47) of 2022 on the taxation of corporations and businesses gives unincorporated partnerships – businesses partnerships that are not registered as separate companies – the option to be treated as a taxable person with prior approval by the Federal Tax Authority (FTA), state news agency Wam said, quoting a ministry statement.

The move is part of efforts to “enhance tax transparency” and improve the UAE's business environment, the report said.

“This Cabinet decision provides businesses with much-needed certainty. The flexibility to choose how to be taxed aligns with international practices and supports smoother implementation of the corporate tax law,” Anurag Chaturvedi, chief executive of financial advisory Andersen UAE, told The National.

The UAE introduced the federal corporate tax with a standard statutory rate of 9 per cent starting from the financial year beginning on or after June 1, 2023. It took the income of companies exceeding Dh375,000 ($102,100) within the taxable bracket.

Business owners in the country would be subject to corporate tax only if their turnover in a calendar year exceeds Dh1 million, the ministry said at the time.

What is an unincorporated partnership?

The decision announced on Saturday is intended to clarify the tax options available to unincorporated partnerships.

These are business partnerships that are not registered as separate legal entities, such as limited liability companies or corporations. Examples include joint ventures or professional service firms, like law or audit partners, that are operating under a partnership agreement without incorporation.

To whom does the law apply?

The law applies to people or entities who are part of unincorporated partnerships in the UAE.

Examples include two consultants operating under a profit-sharing agreement, a group of real estate agents or doctors working as a partnership and foreign partnerships with a UAE-sourced income, Dhruv Tanna, associate vice president at DIFC-based investment and wealth management firm PhillipCapital, said.

What does the new law mean?

Under the new law, unincorporated partnerships now have the option to be taxed as a company, rather than individual partners separately paying corporate tax on their business incomes.

“Upon approval of the application by the partners, the unincorporated partnership will be regarded as a legal person and a resident person for tax purposes,” according to the Wam report.

“It will receive the same tax treatment as other legal persons.”

The move aims to “promote tax neutrality” by allowing unincorporated partnerships to benefit from the exemptions and reliefs available to legal persons under the corporate tax law, it said.

What does the new law clarify?

The new decision aims to clarify how unincorporated partnerships are taxed and provide them with flexibility on how they choose to be taxed, analysts say.

The ministry's decision also makes doing business in the UAE easier.

“It gives businesses a clear framework and flexibility in how and when they want to be taxed at the partnership level and not as per their individual share of income,” Mr Chaturvedi said.

“This flexibility gives businesses the ability to choose what’s most efficient for them, based on their structure and long-term plans.”

Mr Tanna said this flexibility “can make things easier for some businesses, especially those with many partners or complex structures, by simplifying reporting and allowing access to certain tax benefits”.

“It doesn't necessarily raise costs but gives partnerships the choice to manage their tax obligations in a way that suits them best,” he added.

When to opt to become a taxable person?

The partners may choose this option if it simplifies tax filing for multiple partners and if the partnership wants access to corporate tax exemptions or reliefs, Mr Tanna said.

They may also take this option if they want clearer liability separation for legal or financial reasons.

“For example, a partnership with many foreign or corporate partners may benefit from streamlined reporting by being taxed as one entity,” he said.

Opting in to treat the partnership as a taxable person also makes sense if the partnership wants centralised compliance, a cleaner capital structure – such as for external investors – or if it is simpler to have the firm handle tax instead of each partner individually, Mr Chaturvedi said.

How is the tax calculated?

If the partners are taxed individually, each pays the UAE corporate tax of 9 per cent on their share of the business profits. This does not include unrelated personal income like salary from another job or investment income, unless it's linked to the partnership, Mr Tanna said.

If the partnership opts to be treated as a single taxable entity, the partnership itself pays 9 per cent corporate tax on its taxable income – just like a company.