New UAE Corporate Tax Option for Unincorporated Partnerships Explained

The UAE Ministry of Finance has introduced a significant update to the corporate tax framework by offering unincorporated partnerships the choice to be treated as taxable entities under federal tax law. This change is designed to reinforce the principle of tax neutrality and align the UAE’s tax regime with international standards.

Overview of the Policy Update

In a Cabinet decision announced by the Ministry of Finance, businesses operating as unincorporated partnerships may now opt to be taxed at the entity level. This election is available with prior approval from the Federal Tax Authority (FTA) and is applicable under Federal Decree-Law No. 47 of 2022 concerning the taxation of corporations and businesses.

This development enhances tax transparency and offers a more adaptable compliance framework for partnerships that have not incorporated as separate legal entities. It enables them to access the same corporate tax benefits and reliefs granted to incorporated businesses.

Understanding Unincorporated Partnerships

Unincorporated partnerships refer to business arrangements where two or more individuals collaborate under a partnership agreement without forming a separate legal entity, such as a limited liability company or corporation. Common examples include professional service firms—such as accounting, legal, or medical partnerships—and joint ventures.

Scope and Application

The decision impacts any group or individual conducting business as part of an unincorporated partnership within the UAE. This includes, for example, consultants working under a profit-sharing agreement, real estate brokers operating jointly, or foreign partnerships deriving income from UAE sources.

Key Implications of the New Tax Option

By opting to be taxed as a legal entity, a partnership can centralise its tax obligations under one filing, rather than having each partner taxed individually on their respective share of the profits. Once this election is approved, the partnership is recognised as a resident legal person for tax purposes, with the same rights and obligations as incorporated entities.

This approach allows partnerships to access corporate tax exemptions, relief mechanisms, and deductions that are otherwise unavailable when taxed at the partner level. It also simplifies reporting for structures with multiple or foreign partners and supports more transparent financial management.

Strategic Considerations for Partnerships

The option to elect taxation at the partnership level offers several strategic advantages. These include:

• Simplification of tax compliance for partnerships with numerous or foreign partners

• Greater clarity on liability and separation of tax obligations

• Enhanced attractiveness to external investors through a unified tax structure

• Eligibility for specific corporate tax reliefs and deductions

• Improved operational efficiency in tax reporting and planning

According to tax advisors, this flexibility allows business owners to tailor their tax arrangements in a way that supports long-term objectives and structural complexity.

Tax Calculation Under Each Model

If no election is made, each partner remains responsible for paying corporate tax individually on their share of partnership profits, at the standard corporate rate of 9%. This tax applies only to income derived from the partnership and excludes unrelated income such as employment or personal investments, unless directly linked to the business.

Conversely, if the partnership elects to be treated as a taxable person, the entity itself pays corporate tax on its total taxable income, similar to any incorporated company.

Conclusion

This new option marks an important evolution in the UAE’s corporate tax regime, offering greater clarity, flexibility, and efficiency to partnerships. For many unincorporated businesses, particularly those with complex ownership structures or plans for growth, this change presents a valuable opportunity to optimise tax strategy while remaining compliant with local regulations.

Zyla Accountants is available to assist clients in evaluating the implications of this new policy and determining the most beneficial course of action based on their specific business structure.