UAE eases conditions for fiscally transparent treatment of Foreign Partnerships

The United Arab Emirates (UAE) introduced Corporate Income Tax (CIT) effective from 1 June 2023. The new regime recognizes unincorporated partnerships and allows them to be treated as fiscally transparent (i.e., with look-through treatment), provided certain conditions are met. This means that the income of the partnership is directly allocated to the partners for tax purposes. This concept, commonly known in the Investment Funds industry, is internationally recognized and widely used in partnership structures.

Initially, however, the tax transparency of foreign partnerships was contingent on relatively stringent conditions. Due to the practical challenges of meeting these requirements, the UAE Ministry of Finance has now significantly relaxed the requirements for foreign partnerships to be treated as fiscally transparent from a UAE perspective.

Ministerial Decision No. (261) of 2024 (new Ministerial Decision) has replaced the previous Ministerial Decision No. (127) of 2023 (previous Ministerial Decision), which addressed, among other matters, the fiscal transparency of foreign partnerships under the UAE CIT regime. Under the former decision, foreign partnerships were only eligible for tax transparency if they satisfied the following conditions:

• The partnership was not subject to tax in its (foreign) jurisdiction,
• All partners were individually subject to tax with regards to their distributive share of partnership income (which required all partners to treat the partnership as transparent); and
• The partnership jurisdiction had adequate arrangements in place for tax cooperation (i.e., sharing of tax information).

These conditions proved difficult to meet and apply in practice, leading to concerns from industry professionals about their feasibility when the previous Ministerial Decision was published.

The new Ministerial Decision simplifies the rules. Foreign partnerships will now be treated as transparent for UAE CIT purposes if they are treated as transparent in their home jurisdiction. There are no further requirements at the partner level. Additionally, foreign partnerships will be required to submit an annual declaration to the UAE tax authority confirming their status in their home jurisdiction.

The new Ministerial Decision applies retroactively from 1 June 2023, the effective date of the new CIT regime.

This update represents a significant relaxation of the conditions for foreign partnerships to qualify for tax transparency and is a welcome development for investment funds and sovereign wealth funds, which often hold investments through foreign partnerships.