How the UAE’s corporate tax affects informal business partnerships

Corporate tax is applicable in the UAE at a standard statutory rate of 9 per cent from June. Victor Besa / The National

The UAE’s corporate tax has plenty to say about entities pooling resources and business partnerships to deliver objectives.

Let’s look at the detail and consider issues that might arise following the implementation of corporate tax in the UAE on June 1.

There are two types of partnership under the corporate tax decree law.

The more unusual one arguably does not exist. By this, I mean there is no legal entity that represents the partnership.

Fundamentally, it’s a contractual relationship. It does not mean that the partners’ intentions are not documented.

At a minimum, documentation should be completed to capture the parties’ intent.

Speaking either to the degree of trust between the parties or the urgency felt to act before an opportunity is lost, I can’t help but hear my grandfather saying: “act in haste, repent in court”.

When something is being sold, responsibility must lie somewhere distinguishable, otherwise the purchasing party has difficulty in seeking a remedy should delivery go awry.

In the same vein, each of selling party’s constituent partners needs to understand which revenues contributes to whose respective taxable profits.

With partnerships, the decree law provides an answer. Taxable income will be apportioned on the same basis as agreed between the parties. In legalese, partnerships will be considered transparent for corporate tax purposes. If you hear me or one of peers using the words look through, this is what we mean.

With CT, there is a new language set, which you will need to become accustomed to.

Whenever you give choices that have a cost, it is only human nature that the party that is paying will seek the optimum solution for them. Those receiving these monies are watching for how those taxable profits might be manipulated. Clarifications are released for a reason.

With partnerships, counterintuitively, this is more easily managed when the financials have smaller numbers, hence this is a vehicle SMEs are more likely to drive.

What powers of investigation and enforcement are likely to be in place?

Welcome to avoidance versus evasion. Avoidance is legal. It is interpreting the rule book, without triggering the relevant authorities. If they feel compelled to act, you are under investigation for evasion.

At best, if you lose, you will need to prove it was an innocent misdemeanour. At worst, you may need to defend yourself in court under federal prosecution. Corporation Tax is not an Emirate led initiative.

Do not take unnecessary or ill-informed risks.

There is a carve-out for Emiratis. As natural persons who are legally allowed to trade in their own name, they can apply to have their partnership registered for corporate tax in its own right.

It would still be unincorporated, have unlimited liability, while still allowing each individual to register separately in their own name for any other activities they may be conducting that attract corporate tax.

Permission must be sought to manage ones’ affairs in this manner.

There is yet another carve-out for overseas partnerships.

Subject to meeting criteria, it will be deemed an unincorporated partnership.

One of the tests is that the partnership is not subject to corporate tax in the domestic jurisdictions of all the partners.

What I hope is becoming apparent in this series of articles is that there is a lot of detail to be understood within the decree law.

The second type of partnership is an incorporated one. A juridical entity is created for the purpose of achieving the aims of the parties.

These are treated for corporate tax purposes in the same manner as conventional legal entities.

What happens when partners dispute in the midst of making a payable corporate tax declaration?

Monies due must be settled by the entity that owes it. Its owners, conflicted, may individually ignore or decide that they are not paying the amount due.

UAE to introduce federal corporate tax from June 2023 — in pictures

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  The UAE issued its federal corporate tax law that will levy a headline 9 per cent rate on taxable income exceeding Dh375,000. Silvia Razgova / The National

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  Taxable income below the aforementioned threshold will be subject to a 0 per cent rate of corporate tax. Chris Whiteoak/ The National

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  No corporate tax will apply on salaries or other personal income from employment — be it in the government, semi-governmental, or private sector, the Ministry of Finance said. Chris Whiteoak/ The National

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  Businesses will become subject to the UAE corporate tax from the beginning of their first financial year that starts on or after June 1, 2023. Victor Besa / The National

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  The UAE corporate tax regime builds from best practices globally and incorporates principles that are internationally known and accepted. Victor Besa / The National

What happens next raises a regulatory enforcement dilemma.

In the case of, say a listed entity, penalties would be applied and court action taken, if necessary, to recover any monies due.

One would not expect an interrogation of a shareholder list; certain individuals or institutional investors being selected and litigation initiated.

With only two partners, would regulators look through the defaulting entity and prosecute? What if there are five partners?

One thing is indisputable. The squabbling partners positions are of no concern. Their juridical brainchild owes taxes and these must be settled.

The above, I hope, should put paid to commercial agreements made on a handshake.

I’ve been in the UAE long enough to see this done and witnessed the fallout when problems arise.

We should welcome a little more certainty at the cost of a little less flexibility.

David Daly is a partner at the Gulf Tax Accounting Group in the UAE