Where an Unincorporated Partnership has not made an application to be treated as a standalone Taxable Person:
• A partner’s distributive share is the share of partnership profits they are entitled to under the partnership agreement. Where the distributive share cannot be determined (e.g. if there is no partnership agreement), the FTA can prescribe the manner in which profits shall be allocated amongst the partners.305
• Any partnership assets, liabilities, income or expenditure will be allocated to each partner in proportion to their distributive share in the partnership.306
Where an Unincorporated Partnership has not made the election to be treated as a Taxable Person, a partner in the Unincorporated Partnership should follow the ordinary steps outlined in Chapter 6 when calculating their Taxable Income. A partner’s Taxable Income is based on their share of the partnership’s income, expenses, assets and liabilities. They should also take into account:
• expenditure incurred directly by the partner in conducting the Business of the partnership;307 and
• Interest expenditure incurred by the partner in relation to contributions made to the capital account (e.g., cash or assets) of the partnership.308
This expenditure needs to meet the normal rules for deductibility of business expenses. For example, a partner will not be allowed to deduct expenditure relating to personal travel or home rent given that neither of this expenditure is incurred for the purposes of the business.
Any Interest paid to a partner by the partnership on their capital account will be treated as an allocation of income to the partner.309 This forms part of the partner’s Taxable Income and is, therefore, not a deductible expense for the partner in calculating their Taxable Income.
Where a partner receives a salary, draw down or other income derived from their profit share, these amounts will be treated as allocations of income to the partner and will, therefore, usually be taxable on the partner as a distributive share of any partnership profits.
Taxation of an Unincorporated Partnership
An Unincorporated Partnership (X Partnership) has three partners, Miss A and Mr B who are individuals, and C LLC, a juridical person. All partners have the same Financial Year.
Miss A is entitled to 40% of partnership profits while Mr B and C LLC are entitled to 30% each.
During its most recent Tax Period, X Partnership had a net Accounting Income of AED 9,000,000. This was made up of income of AED 15,000,000 and expenses of AED 6,000,000. The income and expenditure would be allocated as follows:
Miss A (40% share of assets, liabilities, income or expenditure):
Income | 6,000,000 |
Expenditure | (2,400,000) |
Accounting Income | 3,600,000 |
Mr B (30% share of assets, liabilities, income or expenditure):
Income | 4,500,000 |
Expenditure | (1,800,000) |
Accounting Income | 2,700,000 |
C LLC (30% share of assets, liabilities, income or expenditure):
Income 4,500,000
Expenditure (1,800,000)
Accounting Income 2,700,000
Each partner would then need to make their own tax adjustments to calculate their
Taxable Income.
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