Taxation of Family Foundations in UAE

1. Introduction to Corporate Tax Law and Family Foundations

The UAE Corporate Tax Law (Federal Decree-Law No. 47 of 2022) introduces a federal tax on corporations and business profits, effective for Tax Periods commencing on or after June 1, 2023.

A “Family Foundation” for Corporate Tax purposes is defined as “any foundation, trust or similar entity that meets the conditions of Article 17(1) of the Corporate Tax Law.” This concept is not a distinct legal entity type but rather a tax classification for entities families use to manage and preserve wealth across generations. It can be a UAE-formed or foreign entity.

Key Definitions:

• Family Foundation: “Any foundation, trust or similar entity that meets the conditions of Article 17(1) of the Corporate Tax Law.”
• Unincorporated Partnership: “A relationship established by contract between two Persons or more, such as a partnership or trust or any other similar association of Persons, in accordance with the applicable legislation of the UAE.” (Fiscally transparent by default).
• Personal Investment: “Investment activity that a natural person conducts for their personal account that is neither conducted through a Licence or requiring a Licence from a Licensing Authority in the UAE, nor considered as a commercial business.”
• Real Estate Investment: “Any investment activity conducted by a natural person related to, directly or indirectly, the sale, leasing, sub-leasing, and renting of land or real estate property in the UAE that is not conducted, or does not require to be conducted, through a Licence from a Licensing Authority.”

2. Fiscal Transparency for Family Foundations

2.1. Juridical Persons vs. Unincorporated Partnerships

• Juridical Persons: Foundations, incorporated trusts (e.g., under Federal Decree-Law No. 31 of 2023), or similar entities with separate legal personality are, in the first instance, subject to Corporate Tax. They can apply to the FTA to be treated as fiscally transparent Unincorporated Partnerships if they meet specific conditions.
• Unincorporated Partnerships: Trusts or similar contractual associations without separate legal personality are, by default, treated as fiscally transparent Unincorporated Partnerships. They do not need to apply for this status but must still meet the Family Foundation conditions to be considered a Family Foundation.

2.2. Conditions to Qualify as a Family Foundation (Article 17(1) of the Corporate Tax Law)

For a juridical person to apply for fiscally transparent status, or for an unincorporated entity to be recognized as a Family Foundation, all the following conditions must be continuously met throughout the relevant Tax Period:

1. Beneficiary Condition: The entity was “established for the benefit of identified or identifiable natural persons, or for the benefit of a public benefit entity, or both.”

• “Identified” beneficiaries are named. “Identifiable” beneficiaries are part of a class (e.g., children/grandchildren), potentially unborn.
• “Public benefit entity” takes its ordinary meaning and does not necessarily have to be a Qualifying Public Benefit Entity under the Corporate Tax Law.
• No minimum/maximum number of beneficiaries or relation requirements.

1. Principal Activity Condition: The “principal activity of the Family Foundation is to receive, hold, invest, disburse, or otherwise manage assets or funds associated with savings or investment.” This includes activities like purchasing/selling assets, generating income streams, and disbursing funds for beneficiaries or charitable activities.
2. No Business Activity Condition: The Family Foundation “does not conduct any activity that would have constituted a Business or Business Activity had the activity been undertaken, or its assets been held, directly by a natural person who is its founder, settlor, or any of its beneficiaries.”

• Activities considered Personal Investment and/or Real Estate Investment by a natural person do not fall under Corporate Tax and are permitted for Family Foundations.
• Example 1: A foundation operating a motel (which would require a license for a natural person) would fail this condition, even if it also rents residential units (which would not).

1. No Tax Avoidance Condition: The “main or principal purpose of the Family Foundation is not the avoidance of Corporate Tax.” Applying for fiscally transparent status is not, in itself, considered tax avoidance.
2. Distribution Condition (if public benefit entities are beneficiaries): If one or more beneficiaries are public benefit entities, the foundation must meet one of two additional conditions:

• “such beneficiaries are not deriving income (through the Family Foundation) that would be considered as Taxable Income had they derived it directly in their own right,” OR
• “the income that would be considered as Taxable Income is distributed to the relevant beneficiaries within 6 months from the end of the relevant Tax Period.”
• Condition (a) is met if all income for the public benefit entity is Exempt Income or if the public benefit entity is a Qualifying Public Benefit Entity.
• Example 2: If a Family Foundation makes a taxable gain (e.g., from selling shares not held for the Participation Exemption period) and a non-qualifying public benefit entity is a beneficiary, the public benefit entity’s share of that gain must be distributed within 6 months of the tax period end.

2.3. Foreign Entities as Family Foundations

A foreign entity (foundation, trust, or similar) can qualify as a Family Foundation if it meets all the conditions of Article 17(1) of the Corporate Tax Law. It may need to register for Corporate Tax if it has a presence (e.g., a nexus) in the UAE.

Example 3: A foreign foundation holding UAE real estate for UAE family members and a foreign charity, having a UAE nexus, can apply for fiscally transparent status. The UAE family members’ income would be tax-exempt Real Estate Investment income. The foreign charity’s share of income from UAE immovable property would be subject to Corporate Tax as a Non-Resident Person.

3. Multi-Tier Structures

A juridical person (not a foundation/trust itself) can also apply to be treated as an Unincorporated Partnership if:

1. It is “wholly owned and controlled by a Family Foundation, either directly or indirectly.” Indirect ownership must be through an uninterrupted chain of fiscally transparent entities.
2. It “meet[s] the conditions specified in Article 17(1) of the Corporate Tax Law.”

• These conditions must be met continuously. Failure to do so means the entity (and its wholly-owned subsidiaries) lose fiscally transparent status from the beginning of that Tax Period.
• Example 7: If a company is 80% owned by a Family Foundation and 20% by a family member directly, it is not wholly owned by the Family Foundation and cannot be fiscally transparent under these provisions.
• Example 9: If an SPV is jointly owned by two separate Family Foundations (e.g., 80% and 20%), it is not wholly owned by one Family Foundation and cannot be fiscally transparent under these provisions.

4. Corporate Tax Implications for Fiscally Transparent Family Foundations

If a Family Foundation is treated as an Unincorporated Partnership (either by default or approval):

• It is not subject to Corporate Tax in its own right; it is fiscally transparent.
• Its assets, liabilities, income, and expenditure are allocated to each beneficiary in proportion to their distributive share (beneficial interest).
• The Corporate Tax treatment is then assessed at the beneficiary level.

4.1. Natural Person Beneficiaries

• Natural person beneficiaries are not subject to Corporate Tax on their distributive share of income from the Family Foundation if it is considered Personal Investment income or Real Estate Investment income.

4.2. Public Benefit Entity Beneficiaries

• If the beneficiary is a Qualifying Public Benefit Entity, it is an Exempt Person and not subject to Corporate Tax.
• If the beneficiary is a public benefit entity that is, or becomes, a Taxable Person, its distributive share of income and expenditure will be included in its Taxable Income.
• Income from Shares and Other Ownership Interests:Dividends from a UAE Resident Person juridical person are exempt.
• Income (dividends, capital gains/losses) from a Participating Interest in a foreign juridical person may be exempt if Participation Exemption conditions are met (assessed at the beneficiary level).
• Deductible Expenditure: Taxable Income of beneficiaries accounts for their distributive share of the Family Foundation’s deductible expenditure.
• Foreign Tax Credit: Taxable beneficiaries may claim a Foreign Tax Credit for foreign-sourced income subject to Corporate Tax.
• Distributions: For public benefit entity beneficiaries, if income is not exempt (or the entity is not a Qualifying Public Benefit Entity), the Family Foundation must distribute the public benefit entity’s share of income within 6 months of the Tax Period end. Failure to do so results in the Family Foundation losing its fiscally transparent status.

5. Tax Compliance

5.1. Registration for Corporate Tax

• Juridical Persons (Family Foundations or wholly-owned subsidiaries): Must register for Corporate Tax first, then apply for fiscally transparent status.
• Family Foundations that are Unincorporated Partnerships by default: Are also required to register for Corporate Tax.
• Natural Person Beneficiaries: Not required to register for Corporate Tax unless they conduct a separate Business or Business Activity in the UAE with Turnover exceeding AED 1 million annually.
• Public Benefit Entity Beneficiaries: Must register for Corporate Tax if they are considered Taxable Persons, regardless of their interest in a Family Foundation (including Qualifying Public Benefit Entities).

5.2. Application for Fiscally Transparent Status

• A juridical person (Family Foundation or wholly-owned subsidiary) meeting the conditions can apply to the FTA to be treated as an Unincorporated Partnership.
• Applications must be made before the end of the relevant Tax Period. For applications submitted on or before December 31, 2025, the effective date can be from the commencement of any Tax Periods ending on or before December 31, 2025.
• Applications can specify the current or next Tax Period for effectiveness.
• Multi-tier structures: An Unincorporated Partnership (by default) that has Family Foundation status can submit an application on behalf of its wholly-owned and controlled juridical persons if they meet the conditions.

5.3. Annual Confirmation

• Family Foundations (or wholly-owned juridical persons treated as Unincorporated Partnerships) must file an annual confirmation within 9 months from the end of the relevant Tax Period.
• The deadline for Tax Periods ending on or before March 31, 2025, is December 31, 2025.
• In multi-tier scenarios, the confirmation can be submitted by the Family Foundation/Unincorporated Partnership for itself and its controlled entities, or by each entity separately.

5.4. Failure to Meet Conditions

• If a Family Foundation or a wholly-owned juridical person, after approval, fails to meet any of the conditions under Article 17(1) of the Corporate Tax Law, it will lose its fiscally transparent status and revert to being a Taxable Person from the beginning of the Tax Period in which the failure occurred.
• In multi-tier structures, if an entity ceases to meet conditions, any entities it holds directly or indirectly will also lose their fiscally transparent status.