How is income from a joint venture taxed?

Article 6.4. Joint Ventures 6.4.1 Articles 3 to 7 and Article 8.2 shall apply for the purposes of computing any Top-up Tax of the Joint Venture and its JV Subsidiaries as if they were Constituent Entities of a separate MNE Group and as if the Joint Venture was the Ultimate Parent Entity of that Group.

Article 16 – Partners in an Unincorporated Partnership 1. Unless an application is made under Clause 8 of this Article, and subject to any conditions the Minister may prescribe, an Unincorporated Partnership shall not be considered a Taxable Person in its own right, and Persons conducting a Business as an Unincorporated Partnership shall be treated as individual Taxable Persons for the purposes of this Decree-Law. 2. Where Clause 1 of this Article applies, a Person who is a partner in an Unincorporated Partnership shall be treated as: Federal Decree-Law No. 47 of 2022 and its amendments – Unofficial translation (as published by the Ministry of Finance) 22 a. Conducting the Business of the Unincorporated Partnership. b. Having a status, intention, and purpose of the Unincorporated Partnership. c. Holding assets that the Unincorporated Partnership holds. d. Being party to any arrangement to which the Unincorporated Partnership is a party. 3. For the purposes of Clause 1 of this Article, the assets, liabilities, income and expenditure of the Unincorporated Partnership shall be allocated to each partner in proportion to their distributive share in that Unincorporated Partnership, or in the manner prescribed by the Authority where the distributive share of a partner cannot be identified. 4. The Taxable Income of a partner in an Unincorporated Partnership shall take into account the following: a. Expenditure incurred directly by the partner in conducting the Business of the Unincorporated Partnership. b. Interest expenditure incurred by the partner in relation to contributions made to the capital account of the Unincorporated Partnership. 5. Interest paid by an Unincorporated Partnership to a partner on their capital account shall be treated as an allocation of income to the partner and is therefore not a deductible expenditure for calculating the Taxable Income of the partner in the Unincorporated Partnership. 6. For the purposes of calculating and settling the Corporate Tax Payable of a partner in an Unincorporated Partnership under Chapter Thirteen of this Decree-Law, any foreign tax incurred by the Unincorporated Partnership shall be allocated as a Foreign Tax Credit to each partner in proportion to their distributive share in the Unincorporated Partnership. 7. A Foreign Partnership shall be treated as an Unincorporated Partnership for the purposes of this Decree-Law where all of the following conditions are met: a. The Foreign Partnership is not subject to tax under the laws of the foreign jurisdiction. b. Each partner in the Foreign Partnership is individually subject to tax with regards to their distributive share of any income of the Foreign Partnership as and when the income is received by or accrued to the Foreign Partnership. Federal Decree-Law No. 47 of 2022 and its amendments – Unofficial translation (as published by the Ministry of Finance) 23 c. Any other conditions as may be prescribed by the Minister. 8. The partners in an Unincorporated Partnership can make an application to the Authority for the Unincorporated Partnership to be treated as a Taxable Person. 9. Where an application under Clause 8 of this Article is approved: a. The provisions of Clauses 1 to 6 of this Article shall no longer apply to the partners in the Unincorporated Partnership in respect of the Business conducted by the Unincorporated Partnership. b. Each partner in the Unincorporated Partnership shall remain jointly and severally liable for the Corporate Tax Payable by the Unincorporated Partnership for those Tax Periods when they are partners in the Unincorporated Partnership. c. One partner in the Unincorporated Partnership shall be appointed as the partner responsible for any obligations and proceedings in relation to this Decree-Law on behalf of the Unincorporated Partnership. 10. Where the application under Clause 8 of this Article is approved, the Unincorporated Partnership shall be treated as a Taxable Person effective from the commencement of the Tax Period in which the application is made, or from the commencement of a future Tax Period, or any other date determined by the Authority.

Meaning of Joint Venture A Joint Venture means an Entity whose financial results are reported under the equity method in the Consolidated Financial Statements of the UPE, provided that the UPE holds directly or indirectly at least 50% of its Ownership Interests.99 Thus, where there is a joint venture arrangement between two MNE Groups, in which one joint venturer holds 51% of the Ownership Interests and the other joint venturer holds 49% of the Ownership Interests, the Entity could only be considered a Joint Venture for one of the MNE Groups, i.e. the MNE Group with the 51% of the Ownership Interests. The definition of Joint Venture sets out a list of Entities that cannot be a Joint Venture:100 • a UPE of an MNE Group that is subject to the Pillar Two Rules, • an Entity that qualifies as a primary Excluded Entity (as explained in section 7.2), • an Entity whose Ownership Interest held by the MNE Group is held directly through a primary Excluded Entity (see section 7.2) and the Entity: - operates exclusively or almost exclusively to hold assets or invest funds for the benefit of its investors, - carries out activities that are ancillary to those carried out by the Excluded Entity, or - substantially all of its income is Excluded Dividends and Excluded Equity Gains or Losses. • an Entity held by an MNE Group composed exclusively of Excluded Entities, or • a JV Subsidiary. Meaning of JV Subsidiary A JV Subsidiary means an Entity whose assets, liabilities, income, expenses and cash flows are consolidated by a Joint Venture under an Acceptable Financial Accounting Standard (or would have been consolidated had it been required to consolidate such items in accordance with an Acceptable Financial Accounting Standard).101 A Permanent Establishment whose Main Entity is a Joint Venture or JV Subsidiary shall be treated as a separate JV Subsidiary.102 99 Definition of Joint Venture Article 18.1 of the QDMTT Legislation. 100 Definition of Joint Venture in Article 18.1 of the QDMTT Legislation. 101 Definition of a JV Subsidiary in Article 18.1 of the QDMTT Legislation. 102 Definition of a JV Subsidiary in Article 18.1 of the QDMTT Legislation. Top-up Tax Guide | Scope and Registration | TTGREG1 68

Example 6: Public and private partnerships An arrangement between a public sector entity (a government department) and a private sector company wherein the public sector entity awards a contract/project to the private sector company for a stipulated period would not, in itself, be considered to be an Unincorporated Partnership if none of the key elements of an Unincorporated Partnership are met. Typically, the intention of such a contract is not to execute the project jointly. Instead, the public sector company engages/awards the project to a private sector company with the intention of encouraging private sector participation in economic and social development, utilising financial, technical, and technological potential/experience of the private sector, transferring knowledge from private to public sector, etc. Typically, the private sector company implements, finances, owns, reaps the commercial benefits and operates a project for an agreed term after which the ownership of the project site is transferred back to the public sector entity. Example 7: Consortium of companies or contractual joint venture Company A and Company B collaborate to bid for a government project to construct and operate a national highway for 30 years. During this period, Company A and Company B sign an agreement to build the highway, share the profits, losses and management of the project equally. After the stipulated tenure the project site is expected to be handed over to the government department. The consortium of companies/contractual joint venture (i.e. between Company A and Company B) would be treated as an Unincorporated Partnership. On the other hand, if the project is conducted through a special purpose vehicle such as a Limited Liability Company in which Company A and Company B hold shares, the joint venture would not be an Unincorporated Partnership. Corporate Tax Guide | Taxation of Partnerships | CTGPTN1 16