On 18 November 2024, the Ministry of Finance (MoF) of the United Arab Emirates (UAE) issued Ministerial Decision No. 261 of 2024, titled “Unincorporated Partnerships, Foreign Partnerships, and Family Foundations under Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses.” This new decision supersedes Ministerial Decision No. 127 of 2023 and is retroactively effective from 1 June 2023. In this alert, we outline the key changes and amendments introduced by the new decision.

💸 Understanding Transfer Pricing 

Transfer pricing refers to the prices charged for goods, services, or intangibles between related parties. These prices should align with the arm’s length principle, meaning they should be consistent with the prices charged in similar transactions between unrelated parties. The goal is to prevent profit shifting and ensure that taxable income is appropriately allocated among jurisdictions. 

Unincorporated Partnership

Unincorporated Partnership shall not be considered a Taxable Person unless it is a juridical person.If an Unincorporated Partnership is treated as a Taxable Person, the responsible partner must report any partner who joins or leaves the partnership during the relevant tax period when filing the Tax Return. This amendment eliminates the previous requirement to notify the Authority within 20 business days and instead integrates this responsibility into the tax return filing process for the applicable period, aligning the reporting with the tax filing timeline.

 

Foreign Partnerships

Foreign Partnership shall be treated as Unincorporated Partnership if it is not subject to any tax of a similar nature to Corporate Tax under the laws of the foreign jurisdiction.

Each partner in a Foreign Partnership will be considered subject to tax on their share of the partnership’s income if the Foreign Partnership is not taxed in its own jurisdiction.

The decision revises the conditions under which a foreign partnership is considered an unincorporated partnership:

a) Under Article 16(7)(a) of the Corporate Tax (CT) Law, a foreign partnership must not be subject to tax under the laws of the foreign jurisdiction. The decision now specifically limits this to taxes similar in nature to Corporate Tax.

b) Each partner in a foreign partnership will be considered subject to tax on their distributive share of any income from the partnership, provided the foreign partnership itself is not taxed in the foreign jurisdiction. This simplifies the previous “subject-to-tax” test at the individual partner’s level, replacing it with a deeming condition based on the foreign partnership’s tax status in the jurisdiction of the individual partner.

c) The requirement for submitting an annual declaration to the Authority confirming compliance with these conditions remains in place, though the prescribed form, manner, and timeline for submission have yet to be set by the Authority.

d) The decision removes the requirement for ensuring “adequate arrangements” between the State and the jurisdiction where the foreign partnership was established for sharing tax information about the partners.

Family Foundation

  1. If a Family Foundation has public benefit entities as beneficiaries, it must meet these additional conditions to be treated as an Unincorporated Partnership:

    1. The beneficiaries must not earn income that would be considered taxable if received directly by them.
    2. Any income that is taxable must be distributed to the beneficiaries within six months after the end of the tax period.

    A legal entity that is fully owned and controlled by a Family Foundation, treated as an Unincorporated Partnership, can make application to the Authority to be treated as an Unincorporated Partnership under Corporate Tax Law if:

    1. The entity is completely owned and controlled by the Family Foundation, either directly or through a chain of other entities that are also treated as Unincorporated Partnerships.
    2. The entity meets the conditions set out in Clause (1) of Article (17) of the Corporate Tax Law.

Let’s understand the following terms:

* A Family Foundation is an entity, such as a foundation or trust, set up to manage and protect the wealth and assets of an individual or family. Its main purpose is to handle funds for the benefit of designated beneficiaries or to support charitable goals. Activities like receiving, holding, and investing funds typically do not qualify as business operations under UAE Corporate Tax (CT) Law if done by the family directly.

Under Article 17 of the UAE CT Law, a Family Foundation can apply to the Federal Tax Authority to be treated as an Unincorporated Partnership. If approved, the foundation would be considered “tax transparent,” meaning it is not taxed as a separate entity, but the beneficiaries or individuals involved are taxed directly.

 

**An Unincorporated Partnership refers to an agreement between two or more individuals to conduct a business or project and share its profits and losses. The key feature of such a partnership is that it does not have a separate legal identity from its partners, and therefore, the business itself is not taxed. Instead, the individual partners are taxed based on their share of the profits.

In simpler terms, a Family Foundation can request to be treated like an Unincorporated Partnership under UAE tax law, meaning it would not be taxed directly, but the individual beneficiaries or owners would be responsible for any taxes.