UAE Unincorporated Partnerships and Pillar Two: is being an “Entity” enough?

The accounting consolidation test

1. Para 21 of the Commentary[1] to Article 1.2.2 explains that a Group is defined by reference to an accounting consolidation test and is comprised of Entities that are related through ownership or control and meet the requirements of Article 1.2.2(a) or (b). Para 22 then clarifies that Article 1.2.2(a) refers to a collection of 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.

The same paragraph further explains that even where no consolidated financial statements exist, the definition may still be satisfied under the deemed consolidation test if the Entities would have been consolidated had an Entity been required to prepare such statements with respect to the Entities it controls.

Therefore, for Pillar Two purposes, Group membership does not depend merely on legal form or on the existence of an Entity in isolation, but on whether the relevant financial results are brought within the consolidation perimeter in the manner contemplated by Article 1.2.2.

2. Accordingly, being an Entity is not enough on its own. An arrangement may satisfy Article 10.1 and still fail to matter under Article 1.2.2(a) if its financial results do not enter the relevant consolidated accounts in the requisite way. That is the bridge between Part 1 and this Part 2: Entity status is a necessary condition, but it is not always a sufficient one.

[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.

IFRS treatment

3. This is where the comparison with IFRS becomes decisive. Under IFRS 11, a joint operation is a joint arrangement in which the parties with joint control have rights to the assets and obligations for the liabilities relating to the arrangement, while a joint venture is a joint arrangement in which those parties have rights only to the net assets of the arrangement.[1] A joint operator therefore recognises, in its own financial statements, its assets, liabilities, revenues and expenses relating to its interest in the joint operation.[2]

By contrast, once an arrangement is classified as a joint venture, the investor recognises an investment and accounts for it using the equity method under IAS 28.[3] Under the equity method, the investment is recognised initially at cost and then adjusted for the investor’s share of the investee’s profit or loss and other comprehensive income, so that the interest is presented as a single investment line rather than through direct recognition of the underlying assets and liabilities.[4]

So, IFRS draws a sharp distinction between arrangements whose underlying assets and liabilities are recognised directly and arrangements that are represented only through a single-line investment.

4. That distinction is not merely accounting mechanics. For Pillar Two purposes, it goes to the heart of whether the arrangement enters the Group at all:

• if the arrangement is reflected on a line-by-line basis, the Article 1.2.2 test is much easier to satisfy;
• if, however, the arrangement is reflected only through a single-line equity method investment, the position is very different.

The reason is simple: a single investment line is not the same as bringing in the arrangement’s assets, liabilities, income, expenses and cash flows as part of the consolidated financial statements of the UPE.

[1] IFRS 11.15–16

[2] IFRS 11.20–21

[3] IFRS 11.24, IAS 28.16

[4] IAS 28.3,10.

Joint operations and the Commentary’s example

5. This is made especially clear by para 23 of the Commentary to Article 1.2.2.[1] The OECD gives the example of a joint operation under IFRS and explains that such an arrangement can still be a separate Entity of the Group, provided that it meets the definition of an Entity under Article 10.1 and provided that the relevant portion of its assets, income, expenses, cash flows and liabilities belonging to the joint operators that are other Entities of the Group is included in the Consolidated Financial Statements on a line-by-line basis. Para 23 then states the point expressly: Entities reported under the pro rata or proportional consolidation method are Constituent Entities of the Group, and only the portion reflected in the Consolidated Financial Statements is taken into account for GloBE purposes, including for the revenue threshold. Therefore, full IFRS 10-style subsidiary consolidation is not the only accounting route by which an Entity may enter the Pillar Two Group perimeter.

6. This shows that Article 1.2.2 is not confined to classic parent-subsidiary consolidation under IFRS 10. The decisive consideration is whether the applicable accounting standard brings the relevant financial statement items into the group accounts line by line, even if only in proportion to the group’s economic share. In that sense, the Commentary is functionally concerned with line-item inclusion, not with the formal accounting label attached to the arrangement.

7. The example also supports three further observations:

• One and the same joint operation may be capable of qualifying as a relevant Group Entity for more than one joint operator, because para 23 focuses on the portion of the arrangement’s assets, liabilities, income, expenses and cash flows that is reflected in the Consolidated Financial Statements of the relevant Group Entity.
• Control in the IFRS 10 sense is not a necessary condition for this analysis. The OECD example expressly concerns a joint operation, and IFRS 11 applies where there is joint control, not sole control. If one party had sole control, the analysis would ordinarily fall under IFRS 10 instead.
• The phrase “line-by-line” does not mean that 100% of the arrangement’s figures must be brought in. Rather, it means that the relevant share is reflected across each relevant line item, rather than through a single investment line.

[1] The Commentary states as follows: “Whether an Entity is part of a Group depends on whether it meets the definition of an “Entity” under Article 10.1 and the requirements set out in paragraph (a). For example, a joint operation (as defined by International Financial Reporting Standards (IFRS) (IFRS Foundation, 2022[1]) could be a separate Entity of the Group provided that it meets the definition of an Entity (e.g. partnership) such that the portion of its assets, income, expenses, cash flows and liabilities belonging to the joint operators that are other Entities of the Group is included in the Consolidated Financial Statements on a line-by-line basis. Therefore, Entities reported under the pro rata or proportional consolidation method are Constituent Entities of the Group. In these cases, the portion of the Entity’s assets, income, expenses, cash flows and liabilities that are reflected in the Consolidated Financial Statements are taken into account for purposes of the GloBE Rules (e.g. the consolidated revenue threshold in Article 1.1 only takes into account the amount of the revenue of the Entity that is reflected in Consolidated Financial Statements)”.

Equity method

8. The contrast with the equity method is therefore stark. Under IFRS 11 and IAS 28, a joint venture is ordinarily accounted for as an investment using the equity method. The investor records one line representing its investment and adjusts that line for its share of the investee’s results. That is not the same as including the investee’s assets, liabilities, income, expenses and cash flows on a line-by-line basis in the investor’s consolidated accounts. For purposes of Article 1.2.2(a), that difference is fundamental. Read together with Commentary paras 22 and 23, the better view is that an arrangement reflected only through the equity method is significantly less likely to qualify as part of the Group under the ordinary consolidation limb.

9. This is the point at which the Part One’s conclusion becomes qualified. A UAE Unincorporated Partnership may well be capable of being an Entity. But if, in the relevant financial statements, it appears only through a single-line equity-accounted investment, its practical relevance for the Group definition may be much weaker than if its financial statement items are brought in directly. Therefore, Article 10.1 may answer the threshold question, but the accounting treatment under the relevant consolidation standard may still determine whether the arrangement matters in practice for Pillar Two.

750 million threshold and beyond

10. This also answers the question whether such an arrangement is counted for the EUR 750 million threshold in full or only proportionately. Paragraph 23 states that where the Entity is reported under the pro rata or proportional consolidation method, only the portion of the Entity’s assets, liabilities, income, expenses, cash flows and revenue that is reflected in the Consolidated Financial Statements is taken into account for GloBE purposes. The conclusion is that the threshold does not operate by reference to 100% of the standalone figures of the arrangement where only a proportionate share is consolidated. Rather, Pillar Two follows the reflected accounting share.

11. The consequences, however, are broader than merely determining how much of the arrangement’s revenue or income is brought within the Pillar Two perimeter. The accounting treatment may also affect whether, and to what extent, the Group is treated as having a relevant presence in a jurisdiction through that arrangement. This matters for at least three reasons.

• Early stages of international expansion.

Initial phase of international activity relief is permitted by Article 9.3 of the GloBE Model Rules. That relief is aimed at groups with a limited international footprint (groups with Constituent Entities in no more than six jurisdictions in total, i.e. up to five jurisdictions outside the reference jurisdiction). In that setting, whether a UAE Unincorporated Partnership is reflected in the Consolidated Financial Statements on a line-by-line or proportionate basis may affect whether the Group is treated as being present in that jurisdiction through the arrangement, and therefore whether that jurisdiction enters the Group’s footprint for purposes of the relief.

• Multinational attribute of the Group.

The GloBE Rules apply to MNE Groups, not to purely domestic groups. A group whose relevant footprint remains entirely within one jurisdiction does not ordinarily fall within the basic multinational scope of Pillar Two in the same way as a group with entities or permanent establishments in other jurisdictions. The question, therefore, is not only whether the foreign partnership brings additional revenue or income into the calculations, but also whether it contributes to the Group’s multinational character for GloBE purposes.

That point becomes particularly important where the foreign partnership does not create a Permanent Establishment for the partner that is already a member of the Group. In such a case, the foreign jurisdiction may still enter the Pillar Two analysis if the partnership itself is treated as a relevant Entity and is brought within the Group perimeter through the applicable financial statements. On the OECD’s approach in para 23 of the Commentary, that can happen where the arrangement is analogous to a joint operation and the relevant share of its assets, liabilities, income, expenses and cash flows is included in the Consolidated Financial Statements on a line-by-line basis, including proportionately. In that scenario, the arrangement may contribute to the Group’s presence in that foreign jurisdiction even without a PE analysis doing the work.

The absence of joint control does not, by itself, answer the question. If the facts support sole control, the analysis may instead move into IFRS 10 and produce line-by-line consolidation. But if the arrangement falls into neither category (neither a joint operation bringing in underlying line items nor a controlled entity consolidated under IFRS 10), the partner may recognise only an investment, and then only its share of profit or loss or distributions. In that case, the argument for treating the partnership as entering the Group perimeter through Article 1.2.2(a) is materially weaker, because the underlying assets, liabilities, income, expenses and cash flows are not themselves reflected line by line in the relevant consolidated financial statements.

• The jurisdictional footprint of the Group under the GloBE architecture.

This matters because Pillar Two operates jurisdiction by jurisdiction, and the accounting treatment may affect not only how much of the arrangement is taken into account, but also where it is taken into account:

a) If the arrangement is reflected line by line, even proportionately, the relevant share of its assets, liabilities, income, expenses, cash flows and taxes is connected directly with the jurisdiction in which the partnership operates.

b) If, however, the arrangement is reflected only through the equity method, or only through distribution income recognised by the partner, the underlying operating jurisdiction may recede and the income may instead appear primarily in the partner’s jurisdiction, where it may be taxable or exempt (adjusted).

The difference is therefore significant. Line-by-line treatment of an arrangement analogous to a joint operation may bring the relevant results into the jurisdiction where the partnership operates even where the activity would not amount to a PE of the partner. The accounting method therefore shapes not only the Group’s quantum of income, but also its jurisdictional footprint under Pillar Two.

So, the accounting method may affect not only measurement, but also whether and where Pillar Two consequences arise.

What this means for UAE Unincorporated Partnerships

12. For UAE Unincorporated Partnerships, the consequence is that the legal analysis cannot stop with Article 10.1. Even if the partnership is accepted as an Entity, one must still ask how it is reflected in the relevant financial statements prepared under the applicable accounting standard:

• If the arrangement is treated in a manner analogous to a joint operation, and the relevant share of its assets, liabilities, income, expenses and cash flows is recognized line by line, para 23 of the Commentary provides a plausible route for it to fall within the Group definition;
• If, by contrast, the arrangement is reflected only through the equity method, or only through the recognition of an investment return or distribution without line-by-line inclusion of the underlying financial statement items, the case is materially weaker under the ordinary Article 1.2.2(a) test.

The same legal arrangement may therefore produce different Pillar Two outcomes depending on how it enters the relevant financial statements.

13. This, in turn, means that the Pillar Two relevance of a UAE Unincorporated Partnership cannot be determined solely by reference to the domestic tax election for opacity or transparency. The accounting perimeter remains critical. A partnership may qualify as an Entity in principle, yet its practical significance for Pillar Two may differ depending on whether:

• the applicable financial statements produce line-by-line inclusion,
• proportionate line-by-line inclusion, or
• only single-line investment accounting.

That distinction matters not merely for the amount of revenue or income taken into account, but also for:

• whether the arrangement contributes to the Group’s multinational character,
• whether it adds to the Group’s jurisdictional footprint, and
• whether the underlying results are connected with the jurisdiction in which the partnership operates or instead arise only indirectly through the partner’s own jurisdiction.

Preliminary conclusion

14. Being an Entity is not enough. Part 1 addressed the threshold definitional issue. Part 2 adds the further requirement that the arrangement must also be relevant under the Group consolidation architecture of Article 1.2.2, as explained in Commentary paragraphs 21 to 23. The analysis must therefore move from legal qualification to accounting inclusion.

15. For that purpose, the crucial distinction is between arrangements whose financial statement items are reflected line by line and arrangements that are reflected only through the equity method or through the recognition of distributions without underlying line-item inclusion. Pro rata or proportional line-by-line inclusion can be sufficient, and that only the reflected portion is then taken into account for GloBE purposes, including for the revenue threshold. By contrast, where the arrangement is accounted for only as an equity-method investment, the ordinary route into the Group definition is significantly harder to establish. The decisive feature is therefore not full ownership, nor even the formal accounting label attached to the arrangement, but whether the applicable accounting treatment brings the relevant share of assets, liabilities, income, expenses and cash flows into the Consolidated Financial Statements on a line-by-line basis.

16. This also explains why the issue matters beyond the revenue threshold alone. The accounting treatment may influence

• whether the Group is treated as being present in a jurisdiction through the arrangement,
• whether a foreign jurisdiction becomes part of the Group’s multinational footprint even in the absence of a PE, and
• whether the underlying financial results are connected with the jurisdiction in which the partnership operates rather than appearing only at the level of the partner through an investment line or distribution.

In that sense, the accounting method affects not only measurement, but also presence, jurisdictional relevance, and the placement of income and taxes within the GloBE architecture.

17. That brings the analysis to the third question. If a UAE Unincorporated Partnership can be an Entity, and if in some cases it can also matter within the Group perimeter, how should the concepts of Ownership Interest, Controlling Interest, and ultimately Ultimate Parent Entity apply to a partnership interest? That is where the next part begins.

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.