Family foundations play an important role in wealth management, succession planning, and asset protection for high-net-worth families within the UAE. With the introduction of the UAE Corporate Tax Law (Federal Decree-Law No. 47 of 2022), it’s far more essential for founders, beneficiaries, and advisors to recognize how family foundations are taxed. The Federal Tax Authority (FTA) launched a complete manual in (CTGFF1) May 2025 to make clear the tax treatment of family foundations under the brand-new regime. This blog will discuss the important factors from the official guide, offering practical insights for families and professionals.
What is a Family Foundation?
A family-foundation is a legal entity installed to hold, manage, and shield belongings for the advantage of family members or other precise beneficiaries. In the UAE, family foundations may also take the form of:
- Foundations (below DIFC, ADGM, or RAK ICC laws)
- Trusts (integrated or unincorporated)
- Similar entities with a primary purpose of wealth renovation and succession
The corporate tax law acknowledges family foundations as different from standard commercial entities, provided they meet particular situations.
Why Taxation Matters for Family Foundations
Historically, the family foundations within the UAE enjoyed sizable tax neutrality. However, the introduction of a corporate tax means that, except when exempted or dealt with as fiscally transparent, a family-foundation can be taxed like another company. The FTA’s manual gives a framework to ensure that genuine family’ foundations aren’t unduly taxed, even as it stops misuse for tax avoidance.
Key Conditions to Qualify as a Family Foundation
For a foundation ,trust, or a similar entity to be treated with as its family-foundation (and potentially benefit from a special tax treatment), it must satisfy the subsequent situations (see Section 5 of the Guide):
- Beneficiary Condition
The foundation’s beneficiaries ought to be people or public advantage entities. The number one reason needs to be to benefit family, contributors, or charitable causes.
- Principal Activity Condition
The Foundation’s main activity should be holding and managing belongings, not carrying commercial enterprise.
- No Business Activity Condition:
The Foundation ought to now no longer be enterprise activities, besides the one’s incidental to asset management (e.g., gathering rent, handling investments).
- No Tax Avoidance Condition:
The structure must not be basically for tax avoidance or evasion.
- Distribution Condition (if applicable):
If public advantage entities are beneficiaries, the inspiration ought to distribute profits to them as required by law.
- Annual Confirmation
The foundation must affirm yearly that it maintains to meet those situations.
Corporate Tax Treatment of Family Foundations
1. Default Position
- Family foundations are dealt with as separate taxable persons under the Corporate Tax Law. That means they may be challenged to pay corporate tax on their profits except when an exemption or unique treatment applies.
2. Application for Unincorporated Partnership Treatment
- Fiscally Transparent Treatment:
If the inspiration meets all qualifying situations, it could be observed to be dealt with as an unincorporated partnership. In this case:
- The Foundation itself isn’t taxed.
- Income is dealt with as accruing immediately to the beneficiaries, who are taxed in line with their very own status (individual, public benefit entity, etc.).”
- This is just like the “look-through” treatment in lots of global tax systems.
3. Application Process:
The Foundation must apply to the FTA for this treatment and offer help documentation. The FTA will check compliance with the situation.
4. Taxation of Beneficiaries
- Natural Person Beneficiaries:
Income disbursed to character beneficiaries is usually now no longer a challenge to UAE company tax, except if it arises from an enterprise or enterprise hobby.
- Public Benefit Entities:
Income disbursed to qualifying public advantage entities is exempt from company tax.
- Payments for Services:
If a beneficiary gives offerings to the inspiration and gets payment, such bills can be challenged for tax as enterprise profits.
Multi-Tier Structures
If a family-foundation owns different entities (e.g., conserving companies), the tax treatment relies upon the structure and activities of every entity. Careful planning is needed to preserve transparency and compliance.
Tax Compliance and Administration
1. Tax Registration
All Family foundations ought to sign up for corporate tax purposes, irrespective of their tax popularity.
2. Annual Confirmation:
Foundations ought to affirm yearly that they in the ability to satisfy the qualifying situations for unique treatment.
3. Record Keeping:
Proper information ought to be maintained to illustrate compliance and help with tax filings.
4. Failure to Meet Conditions:
If a foundation ceases to fulfill the situations, it can lose its unique tax popularity and turn out to be absolutely taxable as a company.
Practical Considerations for Families and Advisors
- Review Foundation Structures:
Ensure your family foundation meets all qualifying requirements. Amend the constitution or consider a deed if necessary.
- Document Activities:
Keep clean information about activities, beneficiaries, and distributions to shield your tax role.
- Seek Professional Advice:
The regulations are complex, particularly for multi-tier or cross-border structures. Engage skilled tax and legal advisors.
- Monitor Regulatory Updates:
The FTA may also issue, guide, or amend regulations. Stay knowledgeable to ensure ongoing compliance.
Conclusion
The UAE’s method of taxing its family’s foundations moves toward stability between preventing tax abuse and helping valid wealth management. By hiring a corporate tax consultant in Dubai and following the FTA’s pointers and ensuring compliance, families can continue to enjoy the flexibility and safety provided through their family’s foundations, even while minimizing tax risks.
For complete details, usually check with the respectable FTA manual and seek advice from expert advisors.
FAQs:
What is a Family Foundation under UAE Corporate Tax?
A Family Foundation is a legal entity designed to manage family wealth with specific tax regulations under UAE law.
Are Family Foundations subject to UAE corporate tax?
Yes, Family Foundations are subject to UAE corporate tax as outlined in the CTGFF1 guide.
When did the UAE Corporate Tax on Family Foundations take effect?
The taxation rules became effective starting May 2025.
What are the main compliance requirements for Family Foundations?
Family Foundations must file tax returns and maintain records according to CTGFF1 guidelines.