The term “family foundation,” within the context of corporate tax law, is not an entity type that is unequivocally recognisable in the UAE’s legal framework. A family foundation is a corporate tax concept, understood as an entity that families may use for the management and preservation of wealth across generations. It is essential to comprehend the connection between Corporate Tax and family foundations in the UAE. In this blog, we gain a general understanding of the concept of a family foundation and its tax implications under the UAE’s tax law.
What is a Family Foundation?
A family foundation is any foundation, trust, or similar entity that meets the conditions of Article 17(1) of the Corporate Tax law. Thus, there are two criteria to consider:
- First, being a foundation, trust, or similar entity, and
- Second, meeting the conditions of Article 17(1) of the tax law (explained in the next section).
A family foundation is an entity that protects and manages the assets and wealth of an individual or family. The primary function of these entities is to receive, hold, invest, disburse, or manage assets linked to investments and the savings of an individual or a family. Furthermore, a family foundation can also exist to achieve a charitable purpose. However, it is important to note that these activities do not constitute a business activity for corporate tax purposes.
Corporate Tax & Family Foundations
A foundation, or similar entity that is a juridical person, may be subject to Corporate Tax in its own right. However, if the entity meets the specified conditions of the tax law, it will be a family foundation. In this case, the entity will apply to the FTA to be treated as an unincorporated partnership for corporate tax purposes. As a result, it will not be subject to Corporate Tax in its own right (transparent for Corporate Tax purposes). However, the compliance requirements or relevant applications available for unincorporated partnerships under Article 16 of the Corporate Tax Law on a standalone basis will not apply to such entities.
A trust or similar association of persons that is established by contract but is not incorporated is treated as an unincorporated partnership as per the tax law. Therefore, it is fiscally transparent by default. An application to the FTA to be treated as an unincorporated partnership is not required. If a fiscally transparent entity meets the conditions, it will automatically be regarded as a Family Foundation. Hence, there are no administrative requirements to confirm its status, and no application for a fiscally transparent status is required.
Conditions for Family Foundations
A family foundation can apply to the authority for an unincorporated partnership status for tax purposes. However, the foundation has to meet all the following conditions.
1. Beneficiary: The purpose of the family foundation is to provide benefits to the recognised or recognisable natural persons, for the public benefit entity, or both.
2. Principal Activity: The primary function of the foundation is to receive, hold, invest, disburse, or manage assets associated with savings or investments.
3. No Business Activity: The foundation does not conduct any business activity as per Clause 6 of Article 11 of the Tax Law, had the activity been undertaken or its assets been held directly by its founder, settlor, or any of its beneficiaries.
4. No Tax Avoidance: The primary purpose of the family foundation is not to avoid corporate tax.
5. Distribution: The family foundation meets one of the distribution conditions where any of the beneficiaries are public benefit entities.
a) such beneficiaries are not deriving income (through the Family Foundation) that would be considered as taxable income had they derived it directly in their own right, or
b) The income that would be considered as taxable income is distributed to the relevant beneficiaries within 6 months from the end of the relevant tax period.
If the authority approves the application, it treats the foundation as an unincorporated partnership. It’s effective from the start of the tax period of the application or the start of the future tax period. The authority can also prescribe any other suitable date. Furthermore, the authority can also request further information and records to check that the entity still meets the conditions.
Conclusion:
The rise of family foundations within the area of tax planning reflects a growing trend towards wealth conservation. While serving as effective vehicles for asset management, it’s crucial to adhere to the conditions outlined by the tax law. Through this blog, we’ve illuminated key information and conditions surrounding family foundations under the corporate tax in the UAE. The five conditions are: beneficiary, principal activity, no business activity, no tax avoidance, and distribution. Entities must meet all these conditions to attain an unincorporated partnership status for corporate tax purposes.
Creative Zone Tax & Accounting (CZTA):
CZTA offers supreme expertise and bespoke solutions for your business needs. From tax planning to accounting services, we aim to help you achieve financial success while ensuring full compliance. With us, you’ll gain a trusted partner committed to your financial well-being. This, in turn, allows you to focus on what you do best—growing your business. Contact us today and experience the difference firsthand.
