What is an Unincorporated partnership?
A contractual relationship between two or more individuals, such as a partnership, trust, or any similar association, formed in compliance with the relevant laws and regulations of the State.
Treatment of Unincorporated Partnerships under the Corporate Tax Law
An unincorporated partnership shall not be treated as a Taxable Person in its own right unless an application is made to that effect. The individual members shall be deemed to be carrying out the business of such partnership and shall be subject to tax on their respective share.
However, an application can be made to the Authority for the Unincorporated Partnership to be treated as a Taxable Person. Once such application is approved, the partnership will be treated as a separate taxable person in its own right. The same shall be irrevocable except in exceptional cases approved by the FTA.
Foreign Partnerships
Foreign Partnerships shall be treated as Unincorporated Partnerships if they meet all of the following conditions:
- They are not subject to corporate tax or equivalent taxation in their home jurisdiction
- Each partner must individually report and pay taxes on their share of the income, if applicable.
Additionally, Foreign Partnerships must file an annual declaration with the FTA to confirm compliance with these conditions.
Registration Requirements for Unincorporated Partnerships
Unincorporated partnerships are required to obtain a Corporate Tax registration number, regardless of whether they choose to be taxed independently or not.
Additional Disclosures by Unincorporated Partnerships
- Additional Disclosures by Unincorporated Partnerships which are not treated as Taxable Persons on its own:
The responsible partner, on behalf of all the partners shall file a declaration within 9 months from the end of the Financial Year of the Unincorporated Partnership which shall include all such details as necessary to determine the Taxable Income of individual partners.
- Additional Disclosures by Unincorporated Partnerships which are treated as Taxable Persons
Responsible partners must report any changes in partnership composition during the tax period when filing returns.
Treatment of Family Foundations under the Corporate Tax Law
Any foundations, trusts, or similar entities can make an application to the Authority to be treated as an Unincorporated Partnership under the Corporate Tax Law if it satisfies all the following conditions:
- Such foundation was established for the benefit of identifiable natural persons or public benefit entities.
- The principal activity of the family foundation is to receive, hold, invest, disburse and manage the assets, or funds associated with the investment.
- The family foundation does not carry out any activities which constitutes Business under the Corporate Tax Law.
- Purpose of such foundation is not the avoidance of Corporate Tax.
- Beneficiaries must not derive income that would be taxable if received directly.
- Any taxable income must be distributed to beneficiaries within six months after the end of the relevant tax period.
Treatment of Juridical Persons owned by Family Foundations
Juridical Persons wholly owned and controlled by Family Foundations can also apply to be treated as Unincorporated Partnerships, provided they meet these conditions:
- The Family Foundation itself qualifies as an Unincorporated Partnership.
- The Juridical Person satisfies all requirements to be considered an Eligible Family Foundation under the Corporate Tax Law.
Key Benefit of such tax treatment for Juridical Persons: Juridical Persons treated as Unincorporated Partnerships are not taxed in their own right. Instead, income is passed through and taxed in the hands of individual members.
Conclusion
These provisions aim to ensure that partnerships and foundations operate with greater transparency while optimizing tax obligations for members and beneficiaries. Businesses and entities affected by this decision should review their compliance processes and consider seeking professional advice to fully leverage the benefits and ensure alignment with the updated regulations