The implementation of corporate tax in the UAE has implications for entities pooling resources and engaging in business partnerships to achieve their objectives. Under the corporate tax decree law, there are two types of partnerships, one of which is a contractual relationship that lacks a legal entity to represent it. Although the partners’ intentions should be documented in writing, there is no legal requirement to establish a legal entity to represent the partnership. This presents a challenge when something is being sold, as responsibility must lie somewhere distinguishable, or the purchasing party may face difficulty in seeking a remedy if delivery goes awry.
Partnerships must also determine how to allocate taxable income to each partner to determine whose respective taxable profits are. The decree law provides an answer: taxable income will be apportioned based on the agreement reached between the partners. For corporate tax purposes, partnerships will be deemed transparent, meaning they will be treated as though they do not exist, and each partner’s taxable income will be calculated on an individual basis. However, this requires careful documentation and agreement between partners.
It is crucial to note that corporate tax introduces a new language, and individuals need to familiarize themselves with the terms to understand the impact of their choices. Those providing the funds will seek to optimize their profits, and those receiving the funds will be watching for any manipulation of taxable profits.
Counterintuitively, managing partnerships’ financials is easier when the numbers are smaller, making it a vehicle more likely to be driven by SMEs. However, corporations must be careful not to take unnecessary or ill-informed risks, as there is a difference between tax avoidance, which is legal, and tax evasion, which is illegal. If an individual or corporation is found guilty of evasion, they may face federal prosecution.
It is worth noting that there is a carve-out for Emiratis. As natural persons who are legally allowed to trade in their own name, they can apply to have their partnership registered for corporate tax in its own right. The partnership will still be unincorporated and have unlimited liability, but each individual can register separately in their own name for any other activities that attract corporate tax.
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