Navigating Corporate Tax in the UAE for Trusts and Family Foundations

Trusts are legal arrangements that separate legal ownership of assets from control. This allows a grantor (the person who creates the trust) to transfer assets to a trustee (the person who manages the assets) for the benefit of beneficiaries (those who receive the assets). Family foundations, on the other hand, are private charitable organizations established by families. They typically have a board of directors who oversee the distribution of funds to designated charitable causes. 

These structures can be instrumental in mitigating corporate tax burdens, facilitating the transfer of assets across generations, and aligning business goals with philanthropic endeavors. However, their implementation requires a deep understanding of complex tax laws in the UAE, reporting requirements, and potential pitfalls. 

In this blog post, we will explore the nuances of trusts and family foundations from a corporate tax perspective. We'll delve into the key considerations, potential benefits, and common challenges associated with these entities, empowering businesses to make informed decisions that align with their long-term objectives. 

This guide unravels the complexities of trusts, family foundations, and how they interact with corporate tax strategies. By equipping you with this knowledge, you'll be equipped to navigate these areas effectively. 

When it comes to wealth management and asset protection, Family Foundations play a crucial role for individuals and families in the UAE. These entities are designed to safeguard and manage assets, savings, and investments for the benefit of individual beneficiaries or to achieve charitable purposes. However, when it comes to Corporate Tax in the UAE, Family Foundations are subject to specific regulations and treatment. 

By nature, when Family Foundations are independent juridical persons with separate legal personalities, making them subject to UAE Corporate Tax in their own right. Their principal activities typically involve receiving, holding, investing, disbursing, or otherwise managing funds and assets associated with savings or investments for the interest of individual beneficiaries or charitable causes. 

Interestingly, Family Foundations in the UAE can apply to be treated as transparent "Unincorporated Partnerships" for Corporate Tax purposes. This special treatment effectively prevents the income of the foundation from attracting UAE Corporate Tax by considering the founder/settlor and beneficiaries as the owners of the assets held by the foundation. 

Once a Family Foundation is treated as an Unincorporated Partnership, the beneficiaries are considered partners in the partnership and are treated as individual Taxable Persons for Corporate Tax purposes. This means that natural persons who are beneficiaries of a Family Foundation treated as an Unincorporated Partnership, are individually subject to UAE Corporate Tax. 

To qualify for the Unincorporated Partnership treatment, Family Foundations must meet specific conditions outlined by the Federal Tax Authority (FTA): 

Application to the FTA: The Family Foundation must submit an application to the Federal Tax Authority to be treated as an Unincorporated Partnership. 

Treatment of Public Benefit Entity Beneficiaries: If one or more beneficiaries of the Family Foundation are in public benefit entities, the foundation must meet one of the following conditions:  

a. The beneficiaries in public benefit entities are not deriving income that would be deemed Taxable Income if they had derived it in their own right.  

b. If condition (a) is not met, the income earned, which will be deemed as taxable income, must be distributed to the relevant beneficiaries within six months from the end of the relevant tax period. 

By adhering to these requirements, Family Foundations can potentially benefit from the Unincorporated Partnership treatment, ensuring that the income generated by the foundation is not subject to UAE Corporate Tax at the entity level. 

Family Foundations in the UAE offer a unique opportunity for individuals and families to protect and manage their assets while potentially benefiting from favorable tax treatment. By qualifying as an Unincorporated Partnership, these entities can effectively bypass Corporate Tax at the entity level, allowing the income to be taxed at the individual beneficiary level instead.  

It is crucial for individuals and families considering the establishment of a Family Foundation in the UAE to understand the specific Corporate Tax implications and seek professional advice to ensure compliance with the applicable regulations. 

However, navigating the complexities of UAE Corporate Tax regulations and ensuring compliance with the necessary requirements is essential. Seeking guidance from experienced professionals can help Family Foundations make informed decisions and maximize the benefits of this tax treatment while adhering to the applicable rules and regulations.