Are Unincorporated Partnerships Subject to Corporate Tax?
Businesses in the UAE have seen big changes since June 2023 because of the new Corporate Tax law. Every type of business must now follow special tax rules made by the UAE government. This new law made a different set of rules for partnership ventures in the Emirates. Partnerships are not always the same, so they get sorted into local partnerships and foreign partnerships.
Local partnerships fall into two groups—incorporated and unincorporated partnerships. This split is important because it affects who pays the tax. Let’s look closely at what these types mean and how they get taxed.
What Are Unincorporated Partnerships in UAE?
The UAE Corporate Tax Law says an unincorporated partnership is when two or more people agree to run a business together, like a partnership or trust. This business is not seen as separate from the people involved. That means the partnership itself does not pay the corporate tax—the partners do.
Incorporated partnerships are different. In that case, the partnership pays corporate tax, and the partners also may pay tax on their share. Foreign partnerships can also be unincorporated if they follow some rules and are not taxed as separate companies in their home country.
How Are Partners Taxed in Unincorporated Partnerships?
When partners join an unincorporated partnership in the UAE, the tax rules treat each partner as if they own a part of the business themselves.
- Each partner pays tax only on their share of the profits.
- If the agreement says one partner gets 60% of the profit, that partner pays tax on 60% only.
- If the contract says someone owns 40%, that’s what they pay tax on.
- The rules are simple: you pay tax on what you are owed from the business.
- If no one can agree on the profit split, the FTA will decide how the profits get divided.
You can also read: UAE Corporate Tax: Determining the Taxable Income for an Unincorporated Partnership
How Does the Tax Process Work for Unincorporated Partnerships?
Unincorporated partnerships in the UAE are sometimes called “fiscally transparent.” This means the business does not pay tax as one big company—the partners pay tax for their share. Still, there are important steps you must follow:
Partnership Registration and Tax Filing
- Every unincorporated partnership must register with the Federal Tax Authority (FTA).
- Each partnership gets a Tax Registration Number (TRN).
- Even if you owe zero tax, you must file a tax return every year.
Taxation of Partners
- Each partner is taxed on their share of income, even if they do not take the money out of the partnership.
- If there are lots of partners or different income sources, the math gets harder, but the rule stays the same—each pays tax on their share.
Income Allocation
- Your partnership agreement should say how much income goes to each partner.
- If there is no agreement, the FTA can decide the share based on what is fair.
Reporting on Tax Returns
- Each partner must include their share of income from the partnership in their own tax return.
- The FTA’s e-Services portal helps partners report their income.
Compliance Checklist for Unincorporated Partnerships
To stay out of trouble, you should remember these important points:
- Register with the FTA:
Every partnership must be registered and have a TRN, even if it owes no tax. - Annual Tax Return:
File a yearly return, no matter how much you make. - Accurate Records:
Keep detailed records of all money in and out of the business. This helps with taxes and FTA rules. - Report Income Properly:
Each partner must report their own share of the income. - Follow Transfer Pricing Rules:
If your partnership does business with related companies, follow the FTA’s rules. - Keep Records for 7 Years:
Hold onto all tax records for seven years, as the law requires.
Pros & Cons of Unincorporated Partnerships
There are some good and bad points with this setup:
Advantages:
- Easier for new or small businesses
- Partners can split profits any way they like
Disadvantages:
- No tax-free status for the business itself
- Every partner must handle their own taxes
- Can get tricky with lots of partners
How Can Mubarak Al Ketbi (MAK) Auditing Help?
When you work with Mubarak Al Ketbi (MAK) Auditing, you get a team that knows the tax laws in the UAE inside and out. We make the process easy, help you file the right forms, and give you advice on saving money. When tax season feels like a maze, you can count on us to lead you out—after all, every cloud has a silver lining!
For more information, please:
- Visit our office: Saraya Avenue Building – Office M-06, Block/A, Al Garhoud – Dubai – United Arab Emirates
- Or contact/WhatsApp: +971 50 276 2132
