Family Foundation Corporate Tax
The family foundation structure is widely known around the world and is used by people for asset protection and succession planning. In the UAE, there are also 3 jurisdictions where individuals can set up a family foundation to hold their assets and earn income from the assets. Ras Al Khaimah International Corporation Center (RAKICC), Dubai International Financial Center (DIFC), and Abu Dhabi Global Market (ADGM) are the jurisdictions where the family foundation can be set up. In this article, we are going to discuss the benefits of family foundations in UAE Corporate Tax.
Before diving into family foundations, let us understand one crucial terminology in UAE Corporate Tax which is an unincorporated partnership. Partners in an unincorporated partnership can be either natural persons (individuals) or juridical persons (companies). Unincorporated partnerships are simple partnerships through agreement, word, etc. between 2 or more legal persons. Article 16 of UAE Corporate Tax Law has outlined unincorporated partnerships, and the nutshell is as follows;
- An unincorporated partnership is not taxable. By default, the partners in the unincorporated partnership are taxable. This means the income and expenditure of an unincorporated partnership need to be divided between the partners, and the tax liability on the profit will be transferred to the partners. This is called a transparent vehicle, there is no distinction between partnerships and partners.
- Unincorporated partnerships can apply to treat partnerships as taxable persons. Once the application is approved by the FTA, the partnership is taxable, and partners are not taxable.
The key point to note: Even if the unincorporated partnership is transparent and tax liability is on partners, the partnership should register and obtain the Corporate Tax registration number (TRN) but is not required to file.
Article 17 of UAE Corporate Tax Law explains that a family foundation can apply to FTA to treat the family foundation as an unincorporated partnership. Once FTA approves, the family foundation is considered a transparent vehicle. Eventually, the Corporate Tax liability will pass to members of the foundation, which can be founders or beneficiaries.
While applying to FTA to treat the family foundation as an unincorporated partnership, the applicant shall make sure that the below conditions are satisfied:
- Beneficiaries: The beneficiaries of a family foundation must be identifiable natural persons (individuals) or public benefit entities or both.
- Principle Activity: The primary objective of the family foundation is to hold and manage assets or funds owned by them.
- Not conducting any business: The foundation should not engage in any business that may be considered a business activity if it had been done by the founder or beneficiary. This means if the foundation is giving management consulting services and getting income in the family foundation. If the same consultancy had been done by the founder or beneficiary, it would have been considered as a business activity. So, the foundation will not be eligible to be treated as an unincorporated partnership.
- Intention or purpose of family foundation: The intention of setting up the family foundation shall not be to avoid taxes.
If the above conditions are satisfied, based on the application and approval from FTA, the Family Foundation is treated as an Unincorporated Partnership (Transparent Vehicle). Unincorporated partnerships are by default not taxable and taxed in the hands of the partners. So, the tax liability will be moved from the foundation to members of the foundation.
The members of the foundation who are natural persons are subject to Corporate Tax once income from business or business activities conducted in the UAE exceeds 1,00,000 dirhams in a calendar year (Cabinet Decision No.49 of 2023). While calculating the 1,000,000 dirhams threshold below incomes are excluded;
- Wages
- Income from real estate investment
- Income from personal investment
As the founder and beneficiaries are taxable based on the application and approval from FTA to treat the family foundation as an unincorporated partnership, the income generated by the foundation is considered taxable in the hands of members of the foundation. Let us understand the summary of all these through a case study:-
Mr Ahmet formed a foundation in DIFC on 15/10/2024 and added his wife and 2 kids as beneficiaries of his assets. As per the charter of the foundation, when Mr. Ahmet is alive, the benefits of the foundation are received 100% by Mr.Ahmet and after his death, the income will be divided among beneficiaries equally.
Below are the assets transferred by Mr.Ahmet to the Family Foundation.
- 10 real estate units located in Dubai are given for rental.
- Ahmet is a 50% shareholder in ABC LLC, and he transferred these shares to a family foundation.
- Ahmet’s person fixed deposits in the bank.
Tax Advisory for the above case
- The family foundation set-up is done on 15/10/2024. As per Decision No. 3 of 2024, the resident juridical person (companies established in the UAE) shall apply for Corporate Tax registration within 3 months from the date of license issuance. The deadline for Corporate Tax registration is 15/01/2025 and failure to register within the deadline can attract AED 10,000 as late registration administrative penalties.
- Assuming the foundation follows the calendar year as the financial year, the first tax period of the foundation is 15/10/2024 to 31/12/2025 (a longer tax period as per the public clarification CTP003).
- Corporate Tax deadline for family foundations will be nine months from the end of the financial year. The first filing deadline is 30/09/2026.
- At the time of Corporate Tax filing (or as prescribed by authority), the foundation can apply for treating the foundation as an unincorporated partnership.
- Once FTA approves the application, the family foundation is no longer taxable, and the partners (Mr. Ahmet, his wife, and his kids) are taxable.
- The expected income from the foundation is rental income from real estate property, capital gain while selling properties, dividend from ABC LLC, capital gain if the sale of a share of ABC LLC, and interest from a fixed deposit.
- As per Cabinet Decision No. 49 of 2023, an individual who gets wages, income from real estate investment (rental, capital gain), and income from personal investment (dividend, capital gain, interest from a fixed deposit) is not considered a business income.
- Thus, the income generated by a family foundation may not fall in the scope of UAE Corporate Tax.
To learn more about Family Foundation Corporate Tax Benefits, book a free consultation with one of the Flyingcolour team advisors.
Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.