UAE Unincorporated Partnerships and Pillar Two: can a partnership interest fit the Ownership Interest, Controlling Interest and UPE chain?

The definitional chain

1. The point of departure is the structure of the GloBE Rules[1] themselves.

Article 1.2.1(a) of the Rules defines a Group as “a collection of Entities that are related through ownership or control such that the assets, liabilities, income, expenses and cash flows of those Entities… are included in the Consolidated Financial Statements of the Ultimate Parent Entity…”. The Ultimate Parent Entity (UPE) is therefore an indispensable component of the Group definition. If no Entity qualifies as a UPE, there can be no Group for Pillar Two purposes.

2. The UPE concept in Article 1.4.1(a) depends on an Entity that:

• “owns directly or indirectly a Controlling Interest in any other Entity”; and
• “is not owned, with a Controlling Interest, directly or indirectly by another Entity”.

The Controlling Interest in Article 10.1, in turn, is defined as “an Ownership Interest in an Entity…”  such that the holder is required to consolidate the assets, liabilities, income, expenses and cash flows of the relevant Entity on a line-by-line basis under an Acceptable Financial Accounting Standard.

The chain therefore begins with Ownership Interest.

3. The difficulty is that Ownership Interest is defined in Article 10.1 as “any equity interest that carries rights to the profits, capital or reserves of an Entity”. That wording immediately raises a question in the case of partnerships: is a partnership interest an equity interest at all within the meaning of the Model Rules? If the answer is negative, the chain may break at the very first link.

[1] OECD (2021), Tax Challenges Arising from Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two): Inclusive Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, https://doi.org/10.1787/782bac33-en.

The textual difficulty: “equity interest”

4. This problem should not be understated. A partner’s interest in an un-incorporated partnership is not usually described, as a matter of com-pany law, in the same way as a share in a corporation. The language of “equity” sits more naturally in the corporate setting, particularly where one is dealing with share capital, reserves, and formal classes of ownership interests. On a narrow textual reading, one might therefore argue that a partnership interest does not fall within the Ownership In-terest definition because it is not an equity interest in the ordinary corporate sense.
5. That reading has real force. The text of the Model Rules does not define Ownership Interest in purely economic terms such as “any interest carrying rights to profits or capital”. Instead, it begins with the phrase “any equity interest” and only then refers to rights to profits, capital or reserves. That drafting suggests that the rights to profits, capital or reserves qualify the relevant interest, but do not eliminate the prior requirement that the interest be capable of being regarded as “equity” in the first place. On that reading, a partnership interest may not fit comfortably within the textual frame of Article 10.1.

Why the issue cannot be answered from legal labels alone

6. At the same time, it would be too quick to conclude that a partnership interest is automatically excluded. IFRS itself defines an equity instrument in IAS 11 as “any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities”. That definition is not restricted to shares in a corporation. It is framed functionally, by reference to residual interest, rather than by reference to corporate form.

7. That point is reinforced by paragraphs 17 and 18 of this Standard. Paragraph 17 states that, subject to the specific exceptions in paragraphs 16A–16D, a critical feature distinguishing a financial liability from an equity instrument is whether the issuer has a contractual obligation to deliver cash or another financial asset. Paragraph 18 then states expressly that the substance of a financial instrument, rather than its legal form, governs its classification. In other words, IFRS does not ask only how domestic law labels the interest; it asks what contractual rights and obligations the instrument creates.

Ownership Interest and partnership economics

8. This is where partnership interests become more interesting. IAS 32 paragraph 18(b) expressly recognises that partnerships may issue puttable interests that are ordinarily classified as financial liabilities, but may still fall within the equity exception in paragraphs 16A and 16B or 16C and 16D. The standard specifically notes that “open-ended mutual funds, unit trusts, partnerships and some co-operative entities” may grant redemption rights that would normally produce liability financial liability rather than equity classification, except where the instrument satisfies those equity exceptions. That wording is important because it shows that IFRS does not treat partnership interests as conceptually incapable of equity classification. On the contrary, it contemplates that partnership interests may, in appropriate cases, be classified as equity instruments.

9. The two relevant equity exceptions are found in IAS 32 paragraphs 16A–16B and 16C–16D. Paragraphs 16A–16B deal with puttable instrument that is nevertheless classified as equity if, among other things, it:

• “entitles the holder to a pro rata share of the entity’s net assets in the event of the entity’s liquidation”;
• “is in the class of instruments that is subordinate to all other classes of instruments”, i.e. (i) “has no priority over other claims to the assets of the entity on liquidation”, and (ii) “does not need to be converted into another instrument before it is in the class of instruments that is subordinate to all other classes of instruments”;
• has identical features within that class, “for example, they must all be puttable, and the formula or other method used to calculate the repurchase or redemption price is the same for all instruments in that class”; and
• have cash flows based substantially on the entity’s profit or loss or net asset changes.

Paragraphs 16C–16D make a similar exception for instruments that impose on the entity an obligation to deliver a pro rata share of the net assets only on liquidation, again subject to strict conditions.

These paragraphs are directly relevant to partnerships because they show that IFRS can treat non-corporate, residual interests as equity even where the instrument would otherwise satisfy the definition of a financial liability.

10. The partnership point becomes even clearer in the application guidance. IAS 32 AG14G gives the example of a limited partnership with limited and general partners and explains that, when assessing whether the relevant partnership instruments qualify for equity classification under paragraphs 16A or 16C, one must disregard contractual features relating to the holder’s role as guarantor rather than as owner. That example shows not only that IFRS contemplates a partnership structure in the equity analysis, but also that it looks functionally to the partner’s rights and obligations as owner, rather than to the domestic legal label attached to the partnership interest.

11. The result is that the inquiry should not be framed as whether the partnership has share capital in the corporate-law sense. The better inquiry is whether the relevant partnership interest evidences a residual interest in the assets of the entity after deducting liabilities within the meaning of IAS 32 paragraph 11, and, where redemption or liquidation features exist, whether the instrument can still fall within the equity exceptions in paragraphs 16A–16D. Read in that way, IFRS provides a stronger basis than company-law terminology alone for arguing that at least some partnership interests may qualify as equity instruments.

But this sends us back to Part Two

12. At this point, however, the analysis must return to the question addressed in Part Two. The fact that a partnership interest may qualify as an equity instrument under IAS 32 does not mean that the partnership has thereby passed the prior Group consolidation test. The two questions are different.

13. Part Two asked whether the partnership’s underlying assets, liabilities, income, expenses and cash flows are brought into the Consolidated Financial Statements on a line-by-line basis. That is the test described in the OECD Commentary to Article 1.2.2. The Commentary explains that a Group is built around an accounting consolidation test and that paragraph (a) refers to Entities whose assets, liabilities, income, expenses and cash flows are included in the Consolidated Financial Statements of the UPE on a line-by-line basis.

14. The OECD’s example of a joint operation then shows that proportionate line-by-line inclusion can be sufficient, whereas a joint venture is ordinarily accounted for under the equity method rather than through line-by-line inclusion. IFRS 11 defines a joint operation as a joint arrangement where the parties have rights to the assets and obligations for the liabilities, and a joint venture as one where the parties have rights only to the net assets of the arrangement. IFRS 11.24 then requires a joint venturer to account for its interest using the equity method.

15. That distinction is crucial here. The very feature that may strengthen the argument for equity classification under IAS 32 (the partner holds a residual interest in the net assets of the arrangement) may also point toward treatment analogous to a IFRS 11 joint venture. This, in turn, incurs recognition of the interest as an investment under the equity method, rather than toward line-by-line inclusion of the underlying financial statement items. If so, the arrangement fails the Stage 2 test even though the partnership interest can plausibly be characterized as equity.

16. In other words, if the partnership interest qualifies as equity under IAS 32, that does not allow the analysis simply to proceed forward to Ownership Interest, Controlling Interest and UPE. On the contrary, it requires to return to the prior question whether the arrangement ever properly entered the Group perimeter at all. Where the arrangement is reflected only through the equity method, rather than through line-by-line or proportionate line-by-line inclusion, the better view is that the ordinary Article 1.2.2 route is not satisfied. In that case, the Stage 3 inquiry becomes largely academic for the purposes of treating the Unincorporated Partnership as a separate Constituent Entity within Pillar Two.

OECD Commentary 2025 on “equity”

17. The OECD Consolidated Commentary[1] confirms that the issue cannot be reduced to the simple proposition that a partnership interest either is, or is not, “equity.” In Commentary to Article 3.2.1, paragraph 57.11, the OECD defines a Qualified Ownership Interest as, inter alia, an investment in a Tax Transparent Entity that “would be treated as an equity interest under an Authorised Financial Accounting Standard in the jurisdiction in which the Tax Transparent Entity operates, where the assets, liabilities, income, expenses, and cash flows of the Tax Transparent Entity are not consolidated on a line-by-line basis in the Consolidated Financial Statements of the MNE Group”.

18. This is highly significant. It shows, first, that the OECD materials do not regard an interest in a Tax Transparent Entity as conceptually incapable of being treated as an equity interest. In that respect, the Commentary aligns with IAS 32, which defines an equity instrument by reference to a residual interest in the assets of an entity after deducting liabilities. The OECD therefore does not insist on a purely corporate-law understanding of equity. A partnership-type interest may, at least in principle, qualify as equity for these purposes.

19. At the same time, paragraph 57.11 is equally important for the opposite reason. The very definition on which the “equity” argument relies is framed for a situation in which the assets, liabilities, income, expenses and cash flows of the Tax Transparent Entity are not consolidated on a line-by-line basis. In other words, the OECD’s express recognition of an “equity” analysis for an interest in a Tax Transparent Entity is given precisely in a setting where the entity does not satisfy the ordinary line-by-line consolidation route discussed in Part Two.

That point should not be overlooked. It means that the fact pattern in which the equity argument is strongest may be the fact pattern in which the Part Two consolidation route is weakest.

20. This is why the sequencing of the analysis matters:

• Part Two asked whether the partnership’s underlying assets, liabilities, income, expenses and cash flows are brought into the Consolidated Financial Statements on a line-by-line basis, whether fully or proportionately, as contemplated by Commentary paragraphs 21 to 23 to Article 1.2.2. That is the ordinary route by which an Entity enters the Group perimeter.
• The point made in paragraph 57.11 is different. It recognises that an interest in a Tax Transparent Entity may still be regarded as “equity” even though the entity’s underlying items are not line-by-line consolidated.

The Commentary therefore does not eliminate the Stage 2 question. Instead, it confirms that the Stage 3 “equity” question may arise precisely where Stage 2 has already become problematic.

21. Put differently, paragraph 57.11 should not be read as rescuing the Group inclusion analysis. It points in the other direction:

• If the interest is analysed as equity because it represents a residual interest in the net assets of a Tax Transparent Entity, that may suggest a position more analogous to an equity-method investment than to a case of line-by-line or proportionate line-by-line inclusion.
• If so, one should not move directly from the IAS 32 discussion to Ownership Interest, Controlling Interest, and Ultimate Parent Entity. One must first return to the Stage 2 question and ask whether the arrangement ever properly entered the Group perimeter at all. Where the answer is negative, the Stage 3 inquiry becomes largely theoretical for the ordinary Pillar Two analysis of the partnership as a separate Constituent Entity.

22. The OECD Commentary reinforces this understanding in paragraph 57.12, which states that Article 8.3 Administrative Guidance[2] applies to ensure consistency of outcomes in respect of Flow-through Entities with Qualified Ownership Interests, and that the Inclusive Framework may develop further conditions if unintended outcomes arise. That is not the language of a settled, general route into Group inclusion. It is the language of a specific, monitored treatment for a special category of interests. This further supports the view that paragraph 57.11 is not a substitute for the ordinary Article 1.2.2 consolidation test analysed in Part Two.

[1] OECD (2025), Tax Challenges Arising from the Digitalisation of the Economy – Consolidated Commentary to the Global Anti-Base Erosion Model Rules (2025): Inclusive Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, https://doi.org/10.1787/a551b351-en.

[2] OECD (2023), Tax Challenges Arising from the Digitalisation of the Economy – Administrative Guidance on the Global Anti-Base Erosion Model Rules (Pillar Two), July 2023, OECD/G20 Inclusive Framework on BEPS, OECD, Paris, www.oecd.org/tax/beps/administrative-guidance-global-anti-base-erosionrules-pillar-two-july-2023.pdf.

Conclusion

23. The foregoing suggests that there are substantial arguments for saying that a partnership interest in a UAE Unincorporated Partnership does not obviously or automatically fit the GloBE definition of Ownership Interest. The wording of “equity interest” remains a real textual obstacle, and that obstacle matters because both Controlling Interest and Ultimate Parent Entity are built upon Ownership Interest. At the same time, IFRS does not support a categorical proposition that a partnership interest can never be equity. IAS 32.11 defines equity instrument by reference to residual interest, not by reference to corporate form, while IAS 32.18(b), 16A–16D, and AG14G show that partnership instruments may in some circumstances be classified as equity instruments.

24. That, however, is not the end of the matter. The fact that a partnership interest may qualify as equity under IAS 32 does not dispense with the prior question addressed in Part Two. On the contrary, it may sharpen it. Where the relevant interest is one in the net assets of the arrangement and is therefore strongest as a candidate for equity classification, the accounting treatment may also point toward equity-method recognition rather than line-by-line or proportionate line-by-line inclusion. In such a case, the arrangement may never have passed the Group consolidation test in the first place.

25. Read together, the three parts of the analysis point in one direction:

• Part One showed that the first hurdle is whether the Unincorporated Partnership can qualify as an Entity at all. On the analysis developed there, that question can be answered in the affirmative in all of the identified scenarios.
• Part Two showed that, even where the partnership is an Entity, it matters for Pillar Two only if it enters the Group perimeter through the relevant consolidation rules. Joint ventures, and other arrangements that are not reflected by the partners on a pro rata line-by-line basis, do not ordinarily satisfy that test.
• Part Three now shows that, for an Unincorporated Partnership to enter the Group as a separate Constituent Entity, the partnership interest would need to qualify as an equity interest. It also shows, however, that the partnerships which pass the Stage Two test are unlikely to satisfy that equity requirement. Conversely, even where one can build a plausible IAS 32 argument that the partnership interest is “equity”, that very conclusion may reinforce the view that the arrangement belongs on the equity-method side of the accounting divide and therefore does not satisfy the prior consolidation stage addressed in Part Two.

26. The better overall view is therefore a restrictive one. A UAE Unincorporated Partnership may face difficulty entering the Pillar Two perimeter as a separate Constituent Entity from either direction:

• it may fail the Part Two consolidation test, or,
• it is unlikely to satisfy equity requirement.

Taken together, Parts One, Two and Three therefore suggest that a UAE Unincorporated Partnership will often struggle to fit naturally within the Pillar Two architecture as a separate Constituent Entity of the partners’ MNE Group.

Disclaimer

Pursuant to the MoF’s press-release issued on 19 May 2023 “a number of posts circulating on social media and other platforms that are issued by private parties, contain inaccurate and unreliable interpretations and analyses of Corporate Tax”.

The Ministry issued a reminder that official sources of information on Federal Taxes in the UAE are the MoF and FTA only. Therefore, analyses that are not based on official publications by the MoF and FTA, or have not been commissioned by them, are unreliable and may contain misleading interpretations of the law. See the full press release here.

You should factor this in when dealing with this article as well. It is not commissioned by the MoF or FTA. The interpretation, conclusions, proposals, surmises, guesswork, etc., it comprises have the status of the author’s opinion only. Furthermore, it is not legal or tax advice. Like any human job, it may contain inaccuracies and mistakes that I have tried my best to avoid. If you find any inaccuracies or errors, please let me know so that I can make corrections.