Trusts and Family Foundations

UAE Corporate Tax on Family Foundations

A family foundation in the UAE is subject to Corporate Tax by default because it is a separate legal entity. You can, however, apply to have your foundation treated as a tax-transparent "unincorporated partnership." If approved by the Federal Tax Authority (FTA), this treatment exempts the foundation itself from tax, and the tax liability instead passes to the beneficiaries based on their status.

What Qualifies as a Family Foundation in the UAE?

A family foundation is a legal structure, such as a trust or foundation, created under UAE law. Its primary purpose is to hold and manage a family's personal assets and wealth. These entities focus on activities like receiving, holding, investing, and disbursing funds for savings and investment. They are not intended for running commercial or trade businesses.

The beneficiaries of a family foundation can be:

Named or identifiable individuals, like family members or friends.
A public benefit entity, such as a charity, religious organization, or educational institution.
A combination of both.

The Default Rule: Are Family Foundations Taxable?

Yes, by default, a family foundation is considered a taxable person under the UAE's Corporate Tax law (Federal Decree-Law No. 47 of 2022). Since it has a separate legal personality from its founders and beneficiaries, its income would normally be subject to the standard corporate tax rate. However, a special election is available to change this treatment.

The Exemption: Achieving Tax Transparency

You can apply to the Federal Tax Authority (FTA) to have your family foundation treated as an "unincorporated partnership" for tax purposes. This makes the foundation tax-transparent. Think of it as a clear glass box; the tax authority looks directly through the foundation to the beneficiaries inside. The foundation itself does not pay tax; the income is treated as if it were earned directly by the beneficiaries.

Conditions to Qualify for Exemption

To successfully apply for this transparent treatment, your family foundation must meet several conditions:

Beneficiary Types: It must be established exclusively for the benefit of named individuals, a public benefit entity, or both.
Principal Activity: Its main activity must be the holding and management of assets and funds related to savings and investments.
No Business Activity: The foundation must not engage in a taxable business or business activity. The law also looks at the activities of the founders and beneficiaries; if their actions, carried out through the foundation, would constitute a taxable business, the exemption may not apply.
Formal Application: You must submit an application to the FTA for this treatment to be recognized.

How Beneficiaries are Taxed

Once a family foundation is treated as a transparent unincorporated partnership, the tax responsibility shifts entirely to its beneficiaries.

Natural Persons (Individuals): Individual beneficiaries are now considered the taxable persons. If they are UAE residents conducting business, they must register for Corporate Tax. The income they receive from the foundation contributes to their own tax liability.
Non-Resident Beneficiaries: Natural persons who are not residents of the UAE are subject to Corporate Tax on the income they receive from the foundation as specified in Article 12 of the Corporate Tax Law and Cabinet Decision No. 49 of 2023.
Public Benefit Entities: If a beneficiary is a public benefit entity that does not meet the criteria to be a "Qualifying Public Benefit Entity," it is treated as a regular taxable person and is subject to corporate tax on the income received.

Strategic Benefits of a UAE Family Foundation

Establishing a family foundation offers significant advantages for long-term wealth management.

Benefit	Details
Asset Protection	A foundation creates a legal barrier that can shield family assets from personal liabilities, creditors, or legal disputes.
Succession Planning	It provides a structured and legally sound way to transfer wealth to the next generation according to your specific wishes, avoiding potential conflicts.
Tax Efficiency	By electing for transparent tax treatment, you prevent a layer of tax at the foundation level, ensuring income is only taxed once at the beneficiary level.
Philanthropic Goals	A foundation is an excellent vehicle for organizing and managing charitable giving to causes or public benefit entities you wish to support.

Important Considerations and Potential Pitfalls

While powerful, family foundations require careful management to maintain their beneficial tax status.

Crossing the Line into Business: The most significant risk is engaging in activities that the FTA could classify as a taxable business. For example, frequently buying and selling properties for profit within the foundation would likely be seen as a business activity, jeopardizing its transparent status. Simply holding property for rental income is generally acceptable.
Administrative Compliance: You must maintain proper records and adhere to all reporting requirements set by the FTA. Failure to comply can result in penalties or the revocation of the transparent treatment.
Beneficiary Tax Obligations: Ensure all beneficiaries understand their personal tax obligations. Since they are now the taxable persons, they are responsible for their own tax registration and filing duties in the UAE if required.

FAQs About UAE Corporate Tax on Family Foundations

What happens if a foundation fails to meet the exemption conditions?

If a foundation no longer meets the conditions, the FTA can revoke its "unincorporated partnership" status. The foundation would then become a taxable entity itself, responsible for paying Corporate Tax on its income from the date the condition was breached.

Does this tax treatment apply to DIFC and ADGM foundations?

Yes, foundations established in financial-free zones like the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM) can also apply for this transparent tax treatment, provided they meet the conditions outlined in the federal Corporate Tax law.

Who applies for the tax exemption—the founder or the foundation?

The application to be treated as an unincorporated partnership is made by the family foundation itself, as it is the legal entity seeking the specific tax classification from the Federal Tax Authority.

Can a beneficiary also be a founder of the foundation?

Yes, a person can be both a founder (or settlor) and a beneficiary of the same family foundation. The tax treatment remains the same; the foundation can still elect for transparency. And that individual will be taxed in their capacity as a beneficiary.

Our Advisor’s Perspective on Family Foundations

The option to treat a family foundation as tax-transparent is a clear signal that the UAE's tax framework is designed to support legitimate wealth preservation and succession planning, not to penalize it. However, this benefit is strictly for entities that function as passive investment vehicles.

The moment a foundation's activities resemble an active commercial enterprise, it risks losing its privileged tax status. The true test is intent and function: is it managing existing wealth, or is it generating new business income? Families must maintain this distinction with disciplined governance to secure the foundation's benefits for generations.

References

Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses.
Ministerial Decision No. 127 of 2023 Regarding the Family Foundation for the Purposes of Federal Decree-Law No. 47 of 2022.
Cabinet Decision No. 49 of 2023 on the Nexus Standard for Non-Residents.
Federal Tax Authority (FTA) of the UAE.

Mostafa Mansour

Mostafa is a seasoned Tax Consultant with over 5 years years of experience gained in diverse taxations matters. He has vast expertise in settling tax disputes with the Federal Tax Authority and handling of tax procedures in compliance with tax laws. He is adept in investigating underlying tax intricacies and offering expert tax advisory. He is also well-versed in conducting tax analysis’s and negotiations with the Tax Regulators, upon tax preparation and filing. Mostafa specializes in the areas of Tax law, Auditing, Accounting and Banking law.