UAE Wealth Holders Can Use Family Foundations to Their Advantage

Many people have opted to use UAE foundations to protect their assets, avoid forced heirship, and ensure a smooth transfer of wealth to the next generation. What caught many off-guard, however, is that when the UAE implemented a corporate income tax, it taxed foundations like companies.

To solve this problem, the UAE tax law allows foundations to elect to be treated as tax transparent, which essentially means the foundation isn’t considered a taxable person. Its income is deemed to belong to the beneficiaries, who would be liable for any tax. Because the UAE doesn’t have a personal income, this basically eliminates tax on anything that wouldn’t be subject to tax if owned by an individual.

Further, direct and indirect UAE subsidiaries of foundations that can also elect to be treated as tax transparent. This is a beneficial solution to the problems posed by the tax law, but not many people know about it or the criteria for taking advantage of it.

When I moved to Dubai 10 years ago, the UAE offered no estate planning options. If you died owning assets in the UAE, they would be distributed in accordance with Sharia estate distribution rules.

Your only option to avoid Sharia estate distribution was to transfer your assets to local companies. Those were in turn owned by offshore companies, which were in turn owned by an offshore trust or foundation—or passed to heirs via a will in that jurisdiction.

Understanding this problem, some UAE free zones (ADGM, DIFC, and RAKICC)—geographic areas where businesses can operate with special regulations and benefits—began implementing will, trust, and foundation laws in 2017. These laws’ introduction gave those with UAE assets local estate planning options for the first time.

Due to its stable political and economic environment, the availability of top-tier professionals, modern trust and foundation laws, and lack of income tax, the UAE became a top trust and foundation planning jurisdiction even for those not based in the UAE and those without UAE assets.

The landscape changed dramatically when the UAE introduced a corporate income tax in 2022. Under the income tax, companies are generally subject to a 9% corporate income tax, as are self-employed individuals and foundations, which are classified as companies for the purposes of the corporate income tax. Most trusts, which are unincorporated contractual arrangements rather than incorporated entities, aren’t subject to the income tax if they aren’t engaged in a business activity.

The introduction of the corporate income tax has had a far-reaching impact on those who earn investment income through UAE companies and foundations. Previously, investment income could be received by UAE companies and foundations tax-free since there was no corporate income tax.

That is no longer the case. Now, income that wouldn’t be taxed in the hands of an individual is subject to tax; there’s essentially a 9% penalty for earning investment income through a UAE company or foundation. This has caused some panic among those earning such income through UAE companies or foundations.

The UAE came up with a unique solution in the corporate tax law. Foundations meeting the definition of a Family Foundation can elect to be treated as unincorporated partnerships for corporate income tax purposes.

This means the foundation is treated as tax transparent with the income deemed to belong to the beneficiaries, and that investment income escapes taxation. Better yet, wholly owned subsidiaries of a Family Foundation can also elect to be treated as tax transparent. This allows multi-tiered structures ultimately owned by a Family Foundation to avoid taxation on investment income.

To qualify as a Family Foundation, a foundation must:

• have been established for the benefit of identified or identifiable natural persons or for the benefit of a public benefit entity
• have the principal activity of holding and managing savings or investment assets
• not engage in a business activity
• not have been established for the avoidance of the corporate income tax
• comply with certain distribution provisions if a public benefit entity is among the beneficiaries

Unincorporated trusts are by default treated as unincorporated partnerships for purposes of the corporate income tax and meet the definition of Family Foundation if the forgoing criteria are met.

The ability of Family Foundations and their wholly owned subsidiaries to be treated as tax transparent removes the tax penalty for owning assets that produce investment income through such structures. This is good news for those who set up UAE foundation or trust structures before the introduction of the corporate income tax.

It also provides a solution for those who set up corporate structures to hold their investment income producing assets prior to the corporate income tax’s introduction. By transferring their corporate structure to a Family Foundation, they can avoid the corporate income tax on investment income, protect their assets, and accomplish their succession planning goals.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Jimmy Sexton is founder and CEO of Esquire Group and chairman of the International Business Structuring Association (Middle East Chapter).

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