Corporate Tax Public Clarification on corporate tax treatment of family wealth management structures

• family foundations;
• holding companies and special purpose vehicles (SPVs) as family wealth management vehicles;
• SFO or MFO;
• and beneficiaries of such structures.

KEY ASPECTS OF THE PUBLIC CLARIFICATION

1. Tax treatment of Family Foundation multi-tier structures

An incorporated foundation, trust, or "similar entity" may apply to the FTA to get recognized as fiscally transparent if it meets all relevant conditions under the Corporate Tax Law. Now the FTA clarified that "similar entity" actually means an entity that has a "similar legal structure or character to a foundation or trust". The clarification emphasizes that a limited liability company (LLC) does not qualify.

Conversely, a Family Foundation or any family wealth management vehicle that does not have a separate legal personality is automatically considered tax transparent (i.e. not a taxable person in its own right). The Public Clarification gives as an example trusts established in Abu Dhabi Global Market ("ADGM") or Dubai International Financial Centre ("DIFC").

Holding companies and SPVs wholly owned and controlled by a tax transparent Family Foundation either directly or indirectly through an uninterrupted chain of other tax-transparent entities may also be treated as fiscally transparent. For a more detailed analysis of the conditions, please refer to our alert.

If the fiscal transparency conditions are not met, Family Foundation and its family wealth management vehicles may benefit from either:

• a 0% corporate tax rate on Qualifying Income from Qualifying Activities for a Qualifying Free Zone Person (if applicable), or
• an exemption on domestic dividends, and/or the participation exemption on capital gains and foreign dividends under standard tax regime.

Income received by family members — individuals from family wealth management structures will not be taxed in their hands where it qualifies as personal investment or real estate investment income.

2. Tax treatment of SFOs and MFOs

MFO or SFO is a Taxable Person and is subject to Corporate Tax on its income.

MFO or SFO may be eligible as a Free Zone Person to apply 0% Corporate Tax rate on Qualifying Income from fund management or wealth and investment management services where these services are subject to the regulatory oversight of the Competent Authority in the UAE. There are only three regulators being mentioned — the UAE Central Bank, the Dubai Financial Services Authority (DFSA) and the Financial Services Regulatory Authority (FSRA).

These services provided by unregulated SFOs or MFOs holding a license but without regulatory oversight by the Competent Authority will not be considered Qualifying Activities. Although SFOs or MFOs might be set up in other jurisdictions in the UAE they may therefore not be eligible to apply QFZP exemption since they are not supervised by the above regulators.

The Clarification emphasizes that SFOs or MFOs must be remunerated at arm’s length for any services provided to their related parties and connected persons. There are SFOs which may not be receiving remuneration for their services, it might be beneficial to reconsider whether some fees should be charged.

Although this Clarification is not binding on taxpayers, it offers a very useful insight into the position of the FTA on taxation of various family wealth management structures.