Taxation of UAE Family Foundations

Introduction to the Corporate Tax Guide on Family Foundations by the Federal Tax Authority (FTA)

The new guide provides the following guidance on the taxation of Family Foundations under the UAE Corporate Tax Law:

1. An overview of the requirements to qualify as a fiscally transparent Family Foundation.
2. A general understanding of how the Corporate Tax Law treats Family Foundations.
3. Information on how the Corporate Tax Law applies to Family Foundations and their beneficiaries.
4. Details regarding the registration, compliance, and other Corporate Tax obligations related to Family Foundations and their beneficiaries. 

In this article, we will address the above areas provided by the guide.

Key Highlights of the Guide:

What are the tax benefits of a Family Foundation?

The tax benefits of a Family Foundation under the UAE Corporate Tax Law include the following:

1. Fiscally Transparent Status: If a Family Foundation is treated as an Unincorporated Partnership, it is considered fiscally transparent and is not subject to Corporate Tax in its own right. ​ Instead, the income, expenditure, assets, and liabilities are allocated to the beneficiaries based on their distributive shares. ​
2. Exclusion of Certain Income for Natural Persons: Beneficiaries who are natural persons are not subject to Corporate Tax on their distributive share of income from the Family Foundation if the income qualifies as:
   • Personal Investment Income: Income from investments conducted for personal purposes. ​
   • Real Estate Investment Income: Income from real estate activities that do not require a commercial license. ​
3. Exemption for Qualifying Public Benefit Entities: If a beneficiary is a Qualifying Public Benefit Entity, it is exempt from Corporate Tax on its distributive share of income from the Family Foundation. ​
4. Participation Exemption: Beneficiaries may benefit from the Participation Exemption for income such as dividends or capital gains from shares in a foreign or UAE juridical person, provided the relevant conditions are met. 
5. Deductible Expenditure: Beneficiaries can deduct their distributive share of expenses incurred by the Family Foundation when calculating their Taxable Income, subject to applicable rules. ​
6. Foreign Tax Credit: Beneficiaries subject to Corporate Tax on foreign-source income may claim a Foreign Tax Credit for taxes paid in the foreign jurisdiction, proportional to their distributive share. ​
7. Distributions Are Tax Neutral: Distributions made by the Family Foundation to beneficiaries are disregarded for Corporate Tax purposes if the underlying income has already been included in the beneficiary’s Taxable Income. ​

These benefits make Family Foundations an attractive structure for managing wealth, investments, and succession planning while optimizing tax obligations. ​

Application of Corporate Tax Law to Family Foundations ​

1. Definition and Status:
   • A Family Foundation is defined as a foundation, trust, or similar entity that meets the conditions of Article 17(1) of the Corporate Tax Law. ​
   • It can apply to the Federal Tax Authority (FTA) to be treated as an Unincorporated Partnership, making it fiscally transparent for Corporate Tax purposes. ​
2. Tax Treatment:
   • If treated as an Unincorporated Partnership, the Family Foundation is not subject to Corporate Tax in its own right. ​
   • Instead, its income, expenditure, assets, and liabilities are allocated to its beneficiaries in proportion to their distributive shares. ​
3. Beneficiaries:
   • Natural person beneficiaries are not subject to Corporate Tax on their share of income, as it is considered Personal Investment or Real Estate Investment income. ​
   • Public benefit entity beneficiaries may be exempt if they are Qualifying Public Benefit Entities. ​ Otherwise, their distributive share may be subject to Corporate Tax. ​
4. Conditions to Qualify:
   • The Family Foundation must meet specific conditions, including:
     • Beneficiary condition: Beneficiaries must be identified natural persons or public benefit entities. ​
     • Principal activity condition: Activities must involve managing assets or funds associated with savings or investments. ​
     • No Business Activity condition: It must not conduct activities that would constitute a Business or Business Activity. ​
     • No tax avoidance condition: Its primary purpose must not be tax avoidance. ​
     • Distribution condition: Income must be distributed to public benefit entities within six months if applicable. ​
5. Multi-Tier Structures:
   • Juridical persons wholly owned and controlled by a Family Foundation may also apply to be treated as fiscally transparent, provided they meet the conditions of Article 17(1).
6. Foreign Entities:
   • Foreign foundations, trusts, or similar entities can qualify as Family Foundations if they meet the conditions of Article 17(1) and have a nexus in the UAE.
7. Compliance:
   • Family Foundations must register for Corporate Tax purposes and file annual confirmations to ensure continued compliance with Article 17(1). ​

The Corporate Tax Law provides a framework for Family Foundations to manage wealth and investments while benefiting from fiscal transparency. ​ By meeting the specified conditions, Family Foundations can ensure their income is allocated to beneficiaries without being subject to Corporate Tax, supporting their intended purpose of wealth preservation and philanthropy. ​

What are the conditions to be a Family Foundation?

To qualify as a Family Foundation under Article 17 of the UAE Corporate Tax Law, the following conditions must be met:

1. Beneficiary Condition: The Family Foundation must be established for the benefit of identified or identifiable natural persons, or for the benefit of a public benefit entity, or both. ​
2. Principal Activity Condition: The principal activity of the Family Foundation must be to receive, hold, invest, disburse, or otherwise manage assets or funds associated with savings or investments. ​
3. No Business Activity Condition: The Family Foundation must not conduct any activity that would constitute a Business or Business Activity if undertaken directly by a natural person who is its founder, settlor, or beneficiary. ​
4. No Tax Avoidance Condition: The main or principal purpose of the Family Foundation must not be the avoidance of Corporate Tax. ​
5. Distribution Condition (if beneficiaries include public benefit entities): If any beneficiaries are public benefit entities, the Family Foundation must meet one of the following:
   • Such beneficiaries must not derive income that would be considered Taxable Income if derived directly. ​
   • Any Taxable Income must be distributed to the relevant beneficiaries within 6 months from the end of the relevant Tax Period. ​

These conditions must be continuously met for the Family Foundation to maintain its status. ​

How can a Family Foundation apply to be treated as an Unincorporated Partnership?

A Family Foundation can apply to be treated as an Unincorporated Partnership (fiscally transparent) under the UAE Corporate Tax Law by following these steps:

1. Ensure Conditions Are Met: The Family Foundation must meet all the conditions specified in Article 17(1) of the Corporate Tax Law (e.g., beneficiary condition, principal activity condition, no business activity condition, etc. ​).
2. Register for Corporate Tax: The Family Foundation must first register for Corporate Tax purposes with the Federal Tax Authority (FTA). ​
3. Submit Application: The application to be treated as an Unincorporated Partnership must be submitted to the FTA before the end of the relevant Tax Period. ​ For applications made on or before 31 December 2025, the application can be effective from the commencement of any Tax Periods ending on or before 31 December 2025. ​
4. Provide Required Information: The application must include relevant details, such as information about the beneficiaries and confirmation that the Family Foundation meets the conditions. ​
5. Specify Tax Period: The Family Foundation must indicate the Tax Period for which the application is made. ​ This can be:
   • The current Tax Period during which the application is submitted. ​
   • The next Tax Period following the Tax Period during which the application is submitted. ​
6. Approval by FTA: If the application is approved, the Family Foundation will be treated as a fiscally transparent Unincorporated Partnership, and the beneficiaries will be considered as directly owning or benefiting from the activities and assets of the Family Foundation. ​

For foreign entities or multi-tier structures, similar application timelines and requirements apply.

The role of Exempt Persons in Family Foundations:

Exempt Persons play a significant role in the context of Family Foundations under the UAE Corporate Tax Law. Here’s how:

1. Exemption from Corporate Tax: Exempt Persons, such as Qualifying Public Benefit Entities, are not subject to Corporate Tax on their distributive share of income from a Family Foundation. ​ This ensures that income allocated to these entities remains tax-free, supporting their philanthropic or public benefit objectives. ​
2. Beneficiary Status: A Family Foundation can include Exempt Persons, such as public benefit entities, as beneficiaries. ​ This aligns with the Corporate Tax Law’s provision that beneficiaries can be identified or identifiable natural persons, public benefit entities, or both. ​
3. Distribution Condition: If a Family Foundation has public benefit entities as beneficiaries, it must meet specific distribution conditions to maintain its status as an Unincorporated Partnership:
   • The public benefit entity must not derive income that would be considered Taxable Income if derived directly. ​
   • Alternatively, the Family Foundation must distribute the income to the public benefit entity within six months of the end of the Tax Period. ​
4. Qualifying Public Benefit Entities: These entities are specifically listed in Cabinet Decision No. ​ 37 of 2023 and meet the conditions set out in Article 9 of the Corporate Tax Law. ​ Their exempt status ensures that income derived through the Family Foundation does not attract Corporate Tax. ​
5. Tax Compliance: Exempt Persons that are beneficiaries of a Family Foundation must register for Corporate Tax if they are considered Taxable Persons. ​ However, their exempt status ensures that their income from the Family Foundation remains unaffected by Corporate Tax. ​

In summary, Exempt Persons, particularly Qualifying Public Benefit Entities, benefit from tax exemptions and play a crucial role in ensuring the Family Foundation complies with distribution conditions and maintains its fiscally transparent status. ​

How are Exempt Persons treated under the Corporate Tax Law?

Under the UAE Corporate Tax Law, Exempt Persons are treated as follows:

1. Exemption from Corporate Tax: Exempt Persons are not subject to Corporate Tax on their income. ​ This includes Qualifying Public Benefit Entities, pension funds, social security funds, and other entities listed in Article 4 of the Corporate Tax Law and Cabinet Decision No. ​ 37 of 2023. ​
2. Qualifying Public Benefit Entities: These entities must meet the conditions set out in Article 9 of the Corporate Tax Law and be listed in Cabinet Decision No. ​ 37 of 2023. ​ Their exempt status ensures that income derived from activities aligned with their public benefit objectives remains tax-free. ​
3. Income from Family Foundations: If an Exempt Person is a beneficiary of a Family Foundation, its distributive share of income is not subject to Corporate Tax. ​ This applies even if the Family Foundation is treated as an Unincorporated Partnership. ​
4. Distribution Condition: If a Family Foundation has public benefit entities as beneficiaries, it must meet specific conditions to maintain its fiscally transparent status:
   • The public benefit entity must not derive income that would be considered Taxable Income if derived directly. ​
   • Alternatively, the Family Foundation must distribute the income to the public benefit entity within six months of the end of the Tax Period. ​
5. Registration Requirement: Exempt Persons that are considered Taxable Persons must register for Corporate Tax purposes, even though their income is exempt. ​ This includes Qualifying Public Benefit Entities. ​
6. Corporate Tax Compliance: Exempt Persons must ensure compliance with the Corporate Tax Law, including filing requirements, if applicable. ​ However, their exempt status ensures that their income remains unaffected by Corporate Tax. ​

In summary, Exempt Persons under the Corporate Tax Law benefit from tax exemptions, particularly when they are beneficiaries of Family Foundations or engage in activities aligned with their public benefit objectives. ​ Their exempt status supports their role in promoting philanthropy, community services, and other public welfare initiatives. ​

Summary and Conclusion:

Summary:

1. Definition:
   • A Family Foundation is a foundation, trust, or similar entity established to manage and preserve wealth across generations. ​ It is recognized for Corporate Tax purposes under Article 17(1) of the Corporate Tax Law. ​
2. Tax Treatment:
   • Family Foundations can apply to be treated as fiscally transparent Unincorporated Partnerships, meaning they are not subject to Corporate Tax in their own right. ​
   • Income, expenditure, assets, and liabilities are allocated to beneficiaries based on their distributive shares. ​
3. Beneficiaries:
   • Natural persons are exempt from Corporate Tax on their share of income, as it is considered Personal Investment or Real Estate Investment income. ​
   • Public benefit entities may be exempt if they qualify as Exempt Persons; otherwise, their share may be subject to Corporate Tax. ​
4. Conditions for Qualification:
   • To be treated as fiscally transparent, a Family Foundation must meet conditions such as:
     • Beneficiary condition (natural persons or public benefit entities). ​
     • Principal activity condition (managing assets or funds). ​
     • No Business Activity condition. ​
     • No tax avoidance condition. ​
     • Distribution condition for public benefit entities. ​
5. Multi-Tier Structures:
   • Entities wholly owned and controlled by a Family Foundation may also apply for fiscal transparency, provided they meet the required conditions. ​
6. Foreign Entities:
   • Foreign foundations, trusts, or similar entities can qualify as Family Foundations if they meet the conditions and have a nexus in the UAE. ​
7. Compliance:
   • Family Foundations must register for Corporate Tax purposes, file annual confirmations, and ensure continued compliance with Article 17(1). ​

Conclusions:

• Family Foundations offer a robust structure for managing wealth, investments, and philanthropic activities, while benefiting from fiscal transparency under the UAE Corporate Tax Law. ​
• By meeting the specified conditions, Family Foundations can ensure tax efficiency for beneficiaries, particularly natural persons and public benefit entities. ​
• Proper compliance with registration, annual confirmations, and distribution requirements is essential to maintain the fiscally transparent status.
• The Corporate Tax Law supports Family Foundations in achieving their intended purpose of wealth preservation and philanthropy, while aligning with the UAE’s tax framework. ​

If you have any questions or wish to discuss and understand the tax implications and compliance requirements for Family Foundations, ensuring alignment with the UAE Corporate Tax regime, please do not hesitate to contact us.