Taxation of Partnerships: Unincorporated vs. Incorporated in the UAE
If you’re part of a partnership in the UAE, your tax obligations will depend on how your business is legally structured. Some partnerships are taxed as separate legal entities. Others pass income directly to the partners, who handle tax individually.
Knowing which rules apply to your setup can save you from filing mistakes, missed deadlines, or unexpected penalties. In this guide, we’ll break down how the UAE Corporate Tax law treats partnerships, what to file, and what to watch for.
Do Partnerships Pay Corporate Tax in the UAE?
Yes, but how they are taxed depends on the legal form of the partnership. Under the UAE Corporate Tax Law, partnerships are divided into two types:
- Incorporated Partnerships
- Unincorporated Partnerships
Each is treated differently when it comes to Corporate Tax. Let’s break it down so it’s easier to understand your next steps.
Incorporated Partnerships
If your partnership is formally set up as a company, like a Limited Liability Partnership (LLP), Limited Partnership (LP), or another recognized business vehicle, t is treated as a juridical person. That simply means the partnership is seen as its own legal “person” separate from the individual partners.
What does that mean in terms of Corporate Tax?
- You must register the partnership with the Federal Tax Authority (FTA)
- You’ll receive a Tax Registration Number
- The partnership will submit its own Corporate Tax return each year
- The first AED 375,000 in taxable income is taxed at 0 percent
- Any taxable income above that is taxed at 9 percent
Incorporated partnerships are also required to:
- Prepare audited financial statements (if thresholds are met)
- Comply with transfer pricing requirements if they transact with related parties
- Keep detailed accounting records for at least seven years
This treatment is most common for businesses where liability protection and formal structure matter, such as consulting firms, legal practices, and investment partnerships.
Unincorporated Partnerships
Now let’s talk about the more informal setups. An unincorporated partnership is any business where two or more individuals operate together without forming a registered entity.
These are more flexible and often used by:
- Professionals (lawyers, doctors, engineers)
- Traders or service providers sharing a license
- Temporary business collaborations
Here’s the key point: These partnerships can elect to be treated as transparent for Corporate Tax.
What does that mean?
- The partnership itself does not pay tax
- Instead, the individual partners pay tax based on their share of the income
- Each partner files their own Corporate Tax return (if thresholds apply)
- The transparent election must be made during registration with the FTA
You must still register the unincorporated partnership and maintain financial records. Even if the partnership isn’t taxed directly, the government still needs visibility into how income is shared.
This tax approach can be useful if partners are natural persons with lower incomes who want to benefit from the AED 375,000 0 percent threshold on their share of profits.
Key Considerations Before You Choose
Before deciding how your partnership is taxed, there are a few important things to think about:
- What kind of partnership do you have? If it’s incorporated, the choice is already made and you are treated as a juridical person.
- Do you want income taxed at the partner level? If so, and you’re eligible, the transparent treatment might reduce your total tax liability.
- Are all partners natural persons? If yes, and each stays below AED 375,000 in profit, they may avoid any tax entirely.
- Will your partnership change structure in the future? If you’re planning to grow, raise investment, or apply for funding, an incorporated form may be more suitable.
Dealing With Profit Sharing and Reporting
Regardless of how you’re taxed, profit sharing must be clearly documented. In both incorporated and unincorporated partnerships, each partner’s share of income and expense must be reflected properly in the records.
For incorporated partnerships:
- The company prepares and files one return
- Distributions to partners are not deductible unless treated as salaries or expenses
For unincorporated partnerships:
- The income is allocated to each partner
- Each partner is responsible for reporting their share and paying any Corporate Tax due
This means accurate bookkeeping is essential. If profit allocations aren’t backed up by agreements or records, the FTA may reject your filings or impose penalties.
Can Partnerships Join a Tax Group?
Yes, incorporated partnerships can apply to join a tax group with other UAE entities if they meet the following conditions:
- At least 95 percent ownership exists between parent and subsidiaries
- All entities use the same financial year and accounting standards
- None of the members are exempt or benefiting from 0 percent Free Zone treatment
Tax grouping allows profits and losses to be pooled, which can reduce the overall tax bill. However, this does not apply to unincorporated partnerships and they cannot be part of a tax group.
VAT and Corporate Tax: Two Different Rules
It’s important not to confuse VAT with Corporate Tax. Just because a partnership is VAT-registered doesn’t mean it is exempt from Corporate Tax registration.
Incorporated and unincorporated partnerships must register for VAT if they exceed the AED 375,000 revenue threshold for taxable supplies. VAT applies to sales and services. Corporate Tax applies to net profit after business expenses are deducted.
Both taxes have their own registration and filing requirements. Even if you’re already handling VAT, don’t assume you’re covered for Corporate Tax.
Example Scenarios
Legal Advisory Group (Unincorporated)
A group of three lawyers works under a shared license. They each serve their own clients but split costs and marketing. They elect transparent treatment. Each lawyer files their Corporate Tax return independently and benefits from the AED 375,000 exemption if eligible.
Engineering Consultancy LLP (Incorporated)
The firm is structured as an LLP. It files a single return and pays Corporate Tax at the entity level. Any partner salaries are deductible if properly structured. Profits retained in the firm are taxed according to CT rules.
Real Estate Joint Venture (Unincorporated)
Two families invest jointly in a commercial rental project. They report their share of rental income individually under the transparent model. Each partner is taxed based on their share of profit.
Creative Agency Startup (Incorporated)
Three founders launch a digital agency under a Limited Liability Partnership. They register for Corporate Tax as a juridical person. The firm files one return and handles all FTA obligations directly.
Penalties for Non-Compliance
Partnerships that fail to register or file on time may face penalties—even if no tax is due. Common penalties include:
- AED 10,000 for late registration
- Daily fines for late submission of tax returns
- Additional charges for incorrect or incomplete filings
If one partner underreports income in a transparent setup, the FTA may audit the entire group and apply penalties to all.
That’s why it’s critical to:
- Document your profit-sharing agreement
- Maintain consistent accounting across all partners
- Use clear roles and responsibilities for filing
Using Technology to Stay Compliant
Managing a partnership’s tax reporting can be tricky especially when multiple partners are involved. Tax Star helps streamline the process by:
- Keeping all registration details in one place
- Reminding you of deadlines
- Helping allocate income and expenses across partners
- Guiding you on document uploads and audit preparation
Whether your partnership is informal or part of a large group, using software like Tax Star can reduce errors and improve compliance.
Frequently Asked Questions
Is Corporate Tax mandatory for all partnerships in the UAE?
Yes, but tax applies differently depending on whether the partnership is incorporated or unincorporated.
Can a partnership change its tax treatment later?
Only with FTA approval. Elections must be made properly and on time.
What happens if partners in a transparent setup earn different amounts?
Each partner is taxed only on their individual share. Unequal splits are fine if documented clearly.
Do unincorporated partnerships still need to keep records?
Yes. Even if the partnership isn’t taxed directly, records are required.
Can a partner be both in an incorporated and unincorporated partnership?
Yes, but each must be tracked separately for tax purposes.
Does a partnership qualify for Small Business Relief?
Only if each partner’s revenue stays under the AED 3 million threshold and other conditions are met.
Are foreign partners taxed in the UAE?
Yes, if the income is UAE-sourced. They may also face tax in their home country depending on treaties.
