Determining the Taxable Income for an Unincorporated Partnership Under UAE Corporate Tax

The introduction of the corporate tax regime has brought about so many significant changes in the business landscape. The businesses that are eligible are now required to stay compliant with the new regime and file the returns on items. Being a new regime, there are still some clarifications required by the entities to untie the complexities and ensure its effective implementation. In this blog, we will discuss the determination of the taxable income for the unincorporated partnerships based on the clarification issued by the FTA. The business entities operating in the partnership structure must be aware of the taxable income and how it is determined.

Unincorporated Partnership Under CT Law

As per the new corporate tax law, unincorporated partnerships are considered as a relationship between 2 or more persons, which might be a partnership, any trust, or any other similar kind of association of persons based on the contract as per or in line with the applicable regulations of the UAE. It might also include any foreign partnership, depending on the criteria met by the entity.

As per the UAE corporate tax law, there is no mandatory requirement for any written agreement for the unincorporated partnership; a verbal agreement can also be considered sufficient.

Determination of the Taxable Income

The partners of a respected unincorporated partnership are considered taxable persons unless and until they apply for treatment of the unincorporated partnership as a taxable person, which must be approved by the FTA.

Under the CT law, the taxable persons, including the partners or the unincorporated partnerships, are mandatorily required to ascertain the taxable income individually based on the IFRS accounting standards applicable.

The partners of the unincorporated partnership, if treated as the taxable person, must prepare the audited financial statements if the individual revenue exceeds the threshold of the AED 50 million.

Also, the unincorporated partnership, when treated as the taxable persons on the application by the partners and approval by the FTA, must mandatorily maintain the audited financial statements if the revenue exceeds the threshold of the AED 50 million.

During the calculation of the taxable income, the accounting income is to be considered as the inception point during the relevant tax period as per the statements, which is then followed by the applicable adjustments as per the general rules according to the taxable income determination.

The partners are instructed to ascertain the joint expenditure and the expenses in the unincorporated partnership along with the net income based on which the income, expenditure, and the net income are then proportioned to the partners based on their distributive shares. The amount is then added with the share of net income of the partnership, from any further business or business activity. This method is applicable where the unincorporated partnership is fiscally transparent.

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Key Highlights To Be Kept in Mind While Determining The Taxable Income

There are some key forms of income and expenditure that might occur in the operations of an unincorporated partnership, which include the following:

• Income which might be received by the unincorporated partnership or the partners: 
• Investment income: The partners and the unincorporated partnership might receive the income from the investments made; hence, the treatment of such income must be based on whether the partnership is fiscally opaque or transparent.
• Profit distribution of an unincorporated partnership: The partners must consider the treatment of the share of profit received under the partnership based on the criteria of whether it is a fiscally transparent or opaque unincorporated partnership.
• Transfer of distributive shares under the partnership: The partners must also consider the gain or loss that might be earned as a part of the sale, transfer, or disposal of the shares in the partnership on its fiscally opaque or transparent nature.
• Expenditures with regards to any business purposes must be considered by the partner during the determination of the taxable income.
• Any expenditure related to the interest must be considered along with the limitations and applicable adjustments.
• Any interest or salary paid to the partners must be considered.
• Any related payments of any services provided by the partners to the partnership must be considered.
• Any reimbursement of the expenditures must also be considered.

The partners to the unincorporated partnership must consider the above highlights and the forms of income and expenses while determining the taxable income, as it can assist them in including all the significant items in the determination. For further assistance, the partners can approach experts like CDA to get the CT sorted for their partnership.

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How Can CDA Assist?

CDA has a team of the best tax professionals who are well versed with the new corporate tax regime. CDA has been providing multiple tax assistance to its clientele for more than a decade, making it one of the leading accounting, auditing, and tax consultation firms in the UAE. CDA is always on standby to provide you with the best tax service anytime you require. The varied services provided by the team at CDA include CT return filing services, CT registration services, CT consultations, and many more. Our team is always at standby to serve you. To know more about our service, approach our team now.