UAE - MoF revises Decision on Partnerships and Family Foundations
29 November 2024 – 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 for the purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses". This new decision replaces Ministerial Decision No. 127 of 2023 and is effective retrospectively from 1 June 2023. In this alert, we summarize the major changes and amendments introduced by the new decision.
Key Highlights
Aspect |
Key Changes/Amendments |
Unincorporated Partnership elects to be treated as a taxable person in its own right |
Simplifies the notification process to the Federal Tax Authority (FTA) for partner changes by requiring a single annual submission with the tax return, rather than within 20 business days of any change. |
Foreign Partnership |
Simplifies and aligns the tax treatment of foreign partnerships in the UAE with their tax treatment in the home jurisdiction, deeming this condition to be satisfied by reference to the tax status of the foreign partnerships as opposed to the actual partners. |
Family Foundation |
Allows a juridical person, wholly owned, and controlled by a family foundation treated as an unincorporated partnership, under certain conditions. |
Detailed Analysis
- Treatment of an Unincorporated Partnership as a Taxable Person
The decision removes the compliance requirement for unincorporated partnerships to notify the FTA within 20 business days when a partner leaves or joins. Instead, this responsibility is now part of the tax return filing for the relevant period. This change aligns the reporting with the tax filing process. This amendment aligns the reporting requirements with the tax return filing process, transitioning the responsibility from a fixed notification period to a tax period-based reporting mechanism.
- Treatment of a Family Foundation as an Unincorporated Partnership
The decision provides revised conditions for a foreign partnership to be considered as an unincorporated partnership:
a) Article 16(7)(a) of Corporate Tax (CT) Law requires that a foreign partnership should not be subject to tax under the laws of the foreign jurisdiction. However, the decision now restricts the scope to cover only a tax that is similar in nature to CT.
b) The decision stipulates that each partner in the foreign partnership shall be considered subject to tax on their distributive share of any income from the foreign partnership if the foreign partnership is not subject to tax in its own right in the foreign jurisdiction.
The former decision 127 of 2023 stipulated that each partner must be subject to tax on their distributive share of the partnership's income in their tax resident jurisdiction. The decision now aims to simplify the complexities involved in the ‘subject-to-tax’ test at the individual partner’s level by introducing a deeming condition based on the tax status of the foreign partnerships in the foreign jurisdiction of the individual partners.
c) The requirement for filing an annual declaration to the FTA confirming that the conditions (as mentioned above) are met remains unchanged. However, the form, manner, and timeline have still not been prescribed in the decision.
d) The decision has also removed the condition for “adequate arrangements exist for cooperation between the State and the jurisdiction under whose applicable laws the Foreign Partnership was established, for the purpose of sharing tax information of the partners in the Foreign Partnership”.
- Treatment of a Family Foundation as an Unincorporated Partnership
The decision allows for the alignment of the tax status of a juridical person that is wholly owned and controlled by a family foundation with the family foundation’s tax-transparent status. As a result, a juridical person fully owned and controlled by a family foundation can elect to be treated as a tax-transparent entity, provided it meets the following conditions:
a) 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 in accordance with the CT Law.
b) The juridical person meets the conditions of clause 1 of Article 17 of the CT Law.
Key Takeaways
This decision reduces the compliance burden for unincorporated partnerships treated as taxable persons by limiting partner change notifications. It also simplifies the process for treating a foreign partnership as unincorporated by referencing the tax status of the foreign partnership in the foreign jurisdiction of the individual partners.
Additionally, it allows special-purpose vehicles owned by family foundations to apply for tax-transparent status, subject to certain conditions. However, practical challenges may arise, including issues related to the transfer of shareholdings, the effective date for obtaining tax-transparent status, maintaining standalone financial statements, and filing returns for periods before and after the change in tax status. Trust MoF or FTA would be providing more guidance in the matter in due course.
Contacts
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You can also contact us and submit all your queries on this email cituae@deloitte.com.
