In this article we look at some of the structures and arrangements that are subject to special rules under the UAE’s new corporate tax (CT).
Incorporated and Unincorporated Partnerships
Before examining the detail of the Tax Law in this case, it is important to understand the distinction between incorporated and unincorporated partnerships. An incorporated partnership refers to entities such as limited liability partnerships, partnerships limited by shares and other arrangements where the partners do not have unlimited liability. These partnerships are taxed the same way as any other corporate entity.
An unincorporated partnership is based on a contractual relationship between two or more partners. These partnerships are normally seen as ‘transparent’ for CT, and the partnership itself is not seen as a Taxable Person. Instead, the individual partners are subject to CT on their share of the income carried on by the partnership. This means that each partner will be liable to register for CT and will need to comply with all of the requirements of the CT Law, including filing an annual tax return. For these purposes, the assets, liabilities, income and expenditure of the partnership will be allocated to each partner in proportion to their distributive share in the partnership.
As an alternative to this treatment, it is possible for an unincorporated partnership to apply to the Federal Tax Authority (FTA) to be treated as a Taxable Person in its own right, similar to the option made available in the VAT regime. This might make the tax accounting more straightforward but there are conditions, including the need to appoint one partner as the ‘partner responsible’ and joint and several liability for any tax payable by the partnership.
Family Trusts and Foundations
The UAE Tax Law defines a Family Foundation as a foundation, trust or similar entity used to protect and manage the assets and wealth of an individual or family.
These bodies could potentially be seen as independent juridical persons and therefore, could be subject to CT. However, they are not usually set up for the purposes of ‘business’, as their normal purpose is to manage the savings and investments of individual beneficiaries. The CT Law therefore includes provisions that make it possible for the foundation to be taxed in the same way as an unincorporated partnership. This effectively means the existence of the foundation can be ignored and the founder, settlor or beneficiaries of the trust are seen as the direct owners of the assets. This means that if the owner is not carrying on a business, any income or gains from the asset will not be liable to CT.
To benefit from this treatment there are conditions that must be met, and the foundation must make an application to the FTA to be treated as an unincorporated partnership. The conditions are as follows:
- The Family Foundation was established for the benefit of identified or identifiable natural persons, or for the benefit of a public benefit entity, or both.
- The principal activity of the Family Foundation is to receive, hold, invest, disburse, or otherwise manage assets or funds associated with savings or investment.
- The Family Foundation does not conduct any activity that would have constituted a Business or Business Activity under the Tax Law had the activity been undertaken, or its assets been held, directly by its founder, settlor, or any of its beneficiaries.
- The main or principal purpose of the Family Foundation is not the avoidance of Corporate Tax.
- Any other conditions as may be prescribed by the Minister.
At the time of publication, the FTA has not published guidance on how the application should be made.
Charities and other ‘Public Interest Entities’
The tax law includes an exemption for Qualifying Public Benefit Entities. These are entities that are:
- established and operated exclusively for religious, charitable, scientific, artistic, cultural, athletic, educational, healthcare, environmental, humanitarian, animal protection or other similar purposes or
- a professional entity, chamber of commerce, or a similar entity operated exclusively for the promotion of social welfare or public benefit.
This is potentially an important relief for organisations that operate in these fields. However, on close inspection it is clear that the exemption is drafted very narrowly. For example:
- the income or assets must be used exclusively in the furtherance of the purpose for which the entity was established and
- no part of the income or assets of the entity is payable to, or otherwise available, for the personal benefit of any shareholder, member, trustee, founder or settlor that is not itself a Qualifying Public Benefit Entity, Government Entity or Government Controlled Entity
In addition, the Tax Law states that the entity will be treated as exempt from the beginning of the Tax Period in which the Qualifying Public Benefit Entity is listed in the Cabinet decision issued at the suggestion of the Minister or any other date determined by the Minister. This suggests that charities and others wishing to take advantage of the exemption will need to be specifically named in an official list – similar to the way in which Designated Charities are listed for VAT purposes.
The overall impact of these provisions is that they will provide useful relief for certain organizations, but many entities operating in these areas will not qualify. For example, a school that is partly privately owned, is very unlikely to qualify for exemption.
At this stage no information has been published regarding how the FTA or Minister will draw up the list of Qualifying Public Benefit Entities. It may be important for organisations that expect, or wish, to be listed to engage with the authorities as early as possible.
BDO insight
The provisions for family foundations and unincorporated partnerships are designed to provide a fair and equitable result for the parties concerned. They ensure that each partner in an unincorporated partnership is taxed directly in proportion to their interest in the partnership, and they ensure individuals whose assets are managed through a family foundation or trust are not automatically taxed as if they were carrying on a business. These are positives, of course, but the tax accounting will not necessarily be straightforward because the structure and agreements that underpin the formation of bodies of this kind can vary from one to another. It is therefore essential to assess each part of the tax provisions carefully to ensure:
- The body concerned fits into the definition in the law.
- Any application (for example to request that a family foundation is treated as an unincorporated partnership) is made in the correct form and at the correct time.
- That documentation and records are available to support the tax treatment applied and any declarations on tax returns. For example, the beneficiaries of income from a family foundation might need to demonstrate that the underlying assets are not held for the purposes of a business. Equally, partners in an unincorporated partnership will need detailed records to support their allocation of assets, income and expenses.
- Numerical simulations are carried out to compare the taxing of profits of an unincorporated partnership in the hands of the individual partners, to taxing the profits as an unincorporated partnership.
The relief for charities and other public interest bodies is another area that must be approached very carefully. It will be a useful relief to those that qualify but the rules are restrictive, and the exemption will be applied very narrowly.
If you need further advice or assistance with any of these matters, or any other tax issue, please contact our corporate tax team.
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