UAE Based Partnership Entities and Their Eligibility to Claim Tax Treaty Benefit ?

Author: CA Gaurav Garg

Since India and UAE have implemented?Comprehensive Economic Partnership Agreement (CEPA), bilateral trade and investment have increased between the two countries and a few days back?the Embassy of the UAE celebrated the second anniversary of the CEPA. As per a news article published in the Economic Times "The CEPA has spurred advancements in trade, with bilateral exchanges increasing from USD 72.9 billion (Apr 21-Mar 2022) to USD 84.5 billion (Apr 22-Mar 2023) registering a year-on-year increase of 16 percent."

As the trade and investments are increasing?so are the queries regarding tax and treaty benefits. One of the common queries that we have encountered is Whether UAE based Partnership Entity is eligible to claim tax treaty benefit between India and UAE??As per our broad analysis, not every partnership entity would be eligible for the tax treaty benefit.

In this article we are sharing our view on this issue for an academic?and education purpose only, the same should?not be considered our formal opinion on the matter.

In determining the tax liability of a Non-Resident (NR) of a foreign country with which India has tax treaty i.e. Double Taxation Avoidance Agreement ('DTAA' or Tax Treaty'), as per section 90(2) of the Income Tax Act (The Act), the provisions of the Act are applicable to the extent that they are more beneficial than those stipulated in the DTAA between India and the NR's country of residence. However, it is to be noted that section 90(2) is subject to General Anti Avoidance Regulations given in Chapter XA of the Act.

Eligibility to claim tax treaty benefit:

As per Article 1 of the tax treaty between India and UAE, a person who is resident of persons of one (India or UAE) or both (India and UAE) of the Contracting States is eligible to claim tax treaty benefit subject to anti abuse provisions of the DTAA. Thus in order to claim the tax treaty benefit one should be;

(i) Person, and

(ii) Resident

As per Article 3(1)(e) of the DTAA,?the term "person" includes an individual, a company, and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting State.

Further, as per Article 4(1)(b) of the DTAA?Resident of a Contracting State?in the case of the UAE means?an individual who is present in the UAE for a period or periods totalling in the aggregate at least 183 days in the calendar year concerned, and a company which is incorporated in the UAE and which is managed and controlled wholly in UAE i.e. tax treaty is applicable only on individuals or company. The definition of 'company' is given in the DTAA and as per the same "company" means any body corporate or any entity which is treated as a company or body corporate under the taxation laws in force in the respective Contracting States.

The reading of above provisions, suggests that a Partnership entity based out of UAE would be eligible to claim the tax treaty benefit if the same is;

• a taxable unit under the UAE tax laws, and
• a company or body corporate or? any entity which is treated as a company or body corporate under UAE tax laws

Based on the above understanding, we have analyzed?the position in various cases;

1.Joint Liability Company:? A Joint Liability Company established under the Commercial Companies Law is a company which consists of two or more physical partners that are severally and jointly liable in all their personal assets for the company’s obligations. The same shall be eligible to claim tax treaty benefit.

2.? Limited Partnership Company:? A Limited Partnership Company established under the Commercial Companies Law is a company which consists of one or more joint partners, having the capacity of traders, who are liable, severally and jointly, for the partnership’s obligations, and one or more silent partners who are not liable for the partnership’s obligations except to the extent of their contribution to the partnership’s capital. The same shall be eligible to claim tax treaty benefit.

3.? Civil Company: As established under Article 92(e) of the Civil Code, a contract, by which two or more persons undertake to contribute jointly to an undertaking of a pecuniary nature by providing a contribution of property or services, with the objective of sharing in the profits or the losses of the undertaking. These are known as civil companies or business partnerships in general parlance. The same shall be eligible to claim tax treaty benefit.

4.? General Partnership: A General Partnership established under the General Partnership Law Dubai International Finance Centre (DIFC) Law No. 11 of 2004 General Partnership being a juridical person is a taxable unit but not a company or a body corporate. The same shall not be eligible to claim tax treaty benefit.

5.? Limited Liability Partnership established under the Limited Liability Partnership Law DIFC Law No. 5 of 2004. Limited Liability Partnership being a juridical person is a taxable unit but not a company or a body corporate. The same shall not be eligible to claim tax treaty benefit.

6. Limited Partnership: A Limited Partnership established under the Limited Partnership Law DIFC Law No. 4 of 2006. Limited Partnership being a juridical person is a taxable unit but not a company or a body corporate. The same shall not be eligible to claim tax treaty benefit.

7. Unincorporated Partnership:?? The Corporate Tax Law of UAE defines an "Unincorporated Partnership" as a relationship established by contract between two or more Persons, in accordance with the applicable legislation of the UAE. This can be to carry on a Business or a project and share its profits and losses, such as a partnership, trust, joint venture, consortium, association of persons, etc. The contract can be verbal or written. Unincorporated Partnership may or not be a taxable person, depending upon the registration with the Federal?Tax Authority. Being the unincorporated?partnership is not a company or a body corporate, the same would not be eligible for the tax treaty benefit.

The above list is an illustrative list and there could be more forms of partnership entities in UAE. In our view, keeping in mind the cross border trade happening between India and UAE, the more work is needed on the tax treaty with regard to partnership entities.

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