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The UAE Ministry of Finance has issued Ministerial Decision No. 261 of 2024, clarifying the taxation framework for Unincorporated Partnerships under the UAE Corporate Tax Law. This decision, effective from 1 June 2023, repeals Ministerial Decision No. 127 of 2023 and issues clarifications in connection with the tax treatment of unincorporated partnerships, foreign partnerships, and family foundations under the Corporate Tax Law.
Unincorporated Partnership
An Unincorporated Partnership is not considered a Taxable Person in its own right unless it is a juridical person. Thus, such an entity enjoys fiscal transparency in the UAE, i.e., its income is taxable in the hands of its partners.
However, such a partnership may choose to be taxed as a juridical person by making an application and seeking approval from the Federal Tax Authority (FTA). Once approved, the responsible partner must disclose any changes in partnership composition during the relevant tax period while filing tax returns.
Foreign Partnership
The decision provides that a Foreign Partnership will be considered as an Unincorporated Partnership for tax purposes if it is not liable for corporate tax under the laws of its home jurisdiction. In such a case, each partner in the Foreign Partnership will also be considered to be subject to tax with regards to its distributive share of any income of the Foreign Partnership. Such entities must submit annual declarations to the FTA, demonstrating adherence to these conditions.
Decision 127 imposed an additional condition that there should be arrangements for cooperation between the UAE and the government of the home country of the Foreign Partnership for sharing information of the partners. This condition has been eliminated in the new decision, thus making it easier for Foreign Partnerships to claim fiscal transparency in the UAE.
Family Foundation
Decision 127 had no specific provision for the tax treatment of family foundations.
Decision 261 now provides for the tax treatment to remove ambiguities in taxation. It elaborates on Family Foundations with beneficiaries who are public benefit entities. Two key conditions are mandated for such entities to qualify as Unincorporated Partnerships:
- Public benefit beneficiaries must not generate taxable income in their own right; and
- Income considered taxable must be distributed to beneficiaries within six months of the end of the relevant tax period.
Additionally, juridical persons owned by Family Foundations may apply for similar tax treatment, provided the juridical person is wholly owned and controlled by the Family Foundation, either directly or indirectly through an uninterrupted chain of other entities, which are treated as Unincorporated Partnerships.
Conclusion
Ministerial Decision No. 261 of 2024 is an important decision as it aligns the country’s tax policies with international best practices, fostering an investor-friendly environment. It also seeks to provide tax certainty to foreign entities desirous of establishing their presence in the UAE. Entities affected by this regulation must consult their tax advisors to understand the possible benefits
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