Foundations & Family Foundations in the UAE: Overview and Corporate Tax Treatment

− An overview! −

The UAE introduced its first-ever federal Corporate Tax (CT) effective from 1 June 2023, marking a significant shift in the region’s tax landscape. While the standard tax rate is 9%, which could have a significate impact on UAE foundations and family foundations. This article attempts to give an overview about topic.

A. What is a UAE Foundation?

A UAE foundation is a legal entity that can hold and manage assets independently of its founder. It has its own legal personality and is commonly used for wealth protection, succession planning, and charitable purposes. It is established by a founder, who transfers assets to the foundation. The foundation is governed by a foundation charter and managed by a council or board.

B. What is a Family Foundation?

A family foundation is a private foundation set up to preserve family wealth, manage inheritance, and plan succession across generations. It can hold family businesses, real estate, or investments, and ensures smooth asset transfer without court involvement.

C. Legal Basis in the UAE

UAE foundations are regulated under:

• DIFC and ADGM foundation regimes (common law jurisdictions);
• Ras Al Khaimah (RAK) and other emirate-level laws for foundations and
• Federal laws where relevant (e.g., UAE Civil Code)

Each zone may have specific rules, especially around confidentiality, governance, and registration.

D. UAE Corporate Tax Treatment of Foundations

With the introduction of UAE Corporate Tax (CT), foundations are recognized as taxable persons. However, they may qualify for special treatment:

I. Taxable Person by Default

A foundation is considered a juridical person and is therefore within the scope of UAE Corporate Tax if it conducts a business or holds assets that generate income.

II. Exemption Option – Elect to be Treated Like a Trust

Foundations may apply to be treated as an unincorporated arrangement, similar to a trust, for UAE CT purposes. This means:

• The foundation itself is not taxed, but
• The income is attributed to the beneficiaries or the founder (depending on the structure)
• This allows for transparent tax treatment

To apply for such “treatment” under the UAE CT rules:

• A formal election must be made to the Federal Tax Authority (FTA)
• The foundation must meet certain conditions, e.g.:
  – Not conducting commercial business;
  – Primarily holding assets for beneficiaries or philanthropic reasons;
  – Proper governance structure in place.

III. Foundations Holding Shares or Assets

If a foundation holds shares in operating businesses:

• Dividends and capital gains earned may be exempt, especially if the participation exemption applies
• Passive income (e.g., interest, royalties) is generally taxable unless exempted

E. Key Takeaways

• Foundations are useful vehicles for succession, asset protection, and family wealth planning.
• They are treated as juridical persons under UAE Corporate Tax unless an election is made to be treated like a trust.
• Foundations not engaged in commercial activity and holding only passive assets may benefit from transparent or exempt tax treatment.
• Proper structuring and legal advice are crucial, especially when electing for exemption or planning asset contributions and distributions.

 

If you and your business need help navigating the UAE Tax system, contact our lawyer Verena Nosko via email at verena@meyer-reumann.com or call the office directly on +971 4 331 7110 for tailored advice and support.