Taxation of Family Foundations Corporate Tax Guide

The Emirates is consistently strengthening its tax system, which makes understanding how the corporate tax treats different structures more important than ever. One of the common structures used in the nation is a family foundation, which is used by businesses to protect their wealth and business growth. Understanding the taxation of family foundations UAE, especially with the recent changes in regulations, is important for any business owner or high-net-worth individual. 

From tax exemptions and special treatment options to tax benefits of family foundations in UAE, you must be aware of key points of this important structure. Continue reading this taxation of family foundations corporate tax guide UAE, which will help you set up or manage a foundation better. 

What is a Family Foundation in UAE?

Before understanding the other details in the taxation of family foundations corporate tax guide UAE, it is important to understand what a family foundation is. In the Emirates, a family foundation is a legal structure that is set up to manage and protect a family’s legacy, wealth, and assets. This is commonly used for succession planning to make sure family businesses, properties, and other assets are passed down smoothly across generations. These can be established in different jurisdictions within the country, including the DIFC and ADGM, and each jurisdiction has different regulations and benefits.

Structure of Family Foundations in UAE 

We understand that a family foundation in UAE is a legal entity built to protect family funds or assets and make sure smooth succession and wealth preservation as per the founder’s wish.

Here’s detailed information on its core components:

• Founder- It can be one or multiple individuals, and defines the purpose and long-term goals for the foundation setup. The initial assets that are placed in the family foundations are provided by the founder.
• Council of Members / Board of Trustees- This group is responsible for managing and overseeing the foundation’s daily operations. Moreover, they manage assets, ensure policy compliance, and distribute benefits fairly to the defined beneficiaries.
• Guardian- A family foundation in UAE might have a guardian, which can be a person or entity appointed to monitor the foundation’s activities, making sure they align with the founder’s wishes. 
• Registered Agent- This can be a person or entity that acts as the official point of contact between the foundation and the relevant government authorities. They receive legal notices and manage all necessary paperwork. 
• Beneficiaries- These can be the founder, their family members, public organizations, and others who benefit from the foundation. 

Conditions to Qualify as a Family Foundation for Tax Purposes

A family foundation can secure special treatment and tax exemptions under the UAE corporate tax law if it meets some specific legal and operational conditions.

Here are the conditions that must be followed to ensure eligibility for this structure: 

1. Purpose of the Foundation- It must be established only for wealth management, asset protection, public benefit, and succession planning, and not be used to make commercial profits. 

2. Eligible Beneficiaries- The beneficiaries, who are usually family members but can be the founder and public benefit organizations, must be clearly defined. 

3. Distribution Restrictions- Income and assets are only distributed per the foundation’s founder’s wish and cannot be used for unrelated personal or business gain. 

4. Limited Business Activity- It must not be involved in regular commercial or business activities unless directly related to managing its assets.

5. Legal Form and Governance- The family foundation must be established in a recognized jurisdiction like DIFC and ADGM, and must be operated under the laws of the chosen jurisdiction. 

6. Notification to the FTA- It must notify the FTA and apply for the relevant tax treatment, like tax exemption and transparent status. 

Benefits of Setting Up a Family Foundation?

Setting up a family foundation in the Emirates is not only about asset protection; it offers many benefits, like long-term planning and legal advantages.

Here are some of its main benefits: 

1. Asset Protection and Control- It protects the founder’s family and personal assets from business risks and legal disputes, as it is a separate legal entity, and all the assets placed in it are legally protected and managed under specific rules. 

2. Efficient Succession Planning- Other than the tax benefits of family foundations in UAE, these help families plan how the wealth and assets will be passed onto future generations, eliminating the issues of disputes and lengthy inheritance procedures. 

3. Corporate Tax Exemptions- If a family foundation meets certain conditions, it will qualify for exemption under the UAE corporate tax

law, resulting in a significant reduction of tax liability on income. It is helpful when the foundation is set up mainly for family wealth or charitable purposes.

4. Confidentiality and Privacy- Foundations offer a higher level of privacy than other business structures, as the ownership and distribution details are not generally made public, making this a suitable choice for families that value privacy. 

5. Long-Term Wealth Preservation- These exist beyond the founder’s lifetime, which means the set rules will preserve the family’s wealth as per the founder’s wish over generations. 

Tax Treatment of Family Foundations Under UAE Corporate Tax

Not all family foundations are treated equally under the UAE corporate tax law. Some are fully exempt, while others secure special treatments or fall under normal corporate tax rules. If you are planning to establish family foundations, you must understand the following options: 

1. When is a Family Foundation Considered a Taxable Person?

If a family foundation is involved in business activities that make income or fail to satisfy other exemption conditions set by the FTA, it is considered a family foundation. In such cases, it is treated like other corporate entities and is subject to the standard corporate tax rate of 0% if its income is below AED 375,000 and 9% if the taxable income is above AED 375,000. Therefore, you must make sure that once you set up a family foundation, it must not generate any income or profits, and simply must be used to manage family assets. 

2. Qualifying as an Exempt Person

If a family foundation in UAE wants to be treated as an exempt person under the UAE corporate tax law, it must satisfy the strict requirements set in Ministerial Decision No. 127 of 2023. Some of the common requirements are defined charitable or private wealth purpose, a list of all beneficiaries, no unrelated business income, registration under a recognized jurisdiction, and others. If all the requirements are satisfied, the foundation will receive approval to enjoy the UAE corporate tax and regulatory benefits, but it will still remain registered with the FTA and file a return to confirm its exempt status. 

3. Electing to Be Treated as an Unincorporated Partnership

If you wish to set up a family foundation in UAE for private wealth purposes but also want it not to be treated as a corporate entity, then it must choose to be treated as an unincorporated partnership. Under this partnership, the family foundation itself will not be taxed, but the tax responsibility will be passed to the beneficiaries. A formal document needs to be submitted to the FTA, and legal and operational requirements must be satisfied to secure this transparent tax treatment. 

4. What if the Foundation Doesn’t Qualify for Exemption?

A family foundation is treated as a taxable entity if it doesn’t meet the exemption conditions and fails to apply for another status. From UAE corporate tax obligations to compliance filings, any non-compliance can result in possible penalties. However, if it wants to benefit from the reliefs and deductions available, the foundation in this category must maintain proper records and financial statements. 

Conclusion

Planning to set up a family foundation in UAE for long-term wealth management, avoiding the long-term procedures during succession planning, and enjoying tax and legal benefits, you are indeed making a smart move. However, the introduction of recent changes in the corporate tax and exemption rules might make it difficult for you to understand the overall family foundation structure. 

With expert assistance, you can secure any requirement, like qualifying for exemption or simply maintaining compliance. Choose Start Any Business UAE (Indian Branch) as your trusted partner in assessing your eligibility, handling complex paperwork, and making sure your foundation is compliant with all requirements and UAE tax laws. Our professionals will help you navigate this process with better clarity and greater confidence. 

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