New UAE FTA Guide on taxation of Family Foundations

Pursuant to the Guide a Family Foundation is a tax concept rather than a distinct legal entity type. In this regard, the definition encompasses foundations, trusts, other similar entities — including those established in Free Zones, under UAE mainland legislation, or in foreign jurisdictions.

The Corporate Tax Law does not elaborate on what qualifies as an entity “similar” to foundation or trust and which key characteristics are necessary to meet this status. The Guide clarifies that such similar entity is one established solely for the purpose of managing family wealth and does not have the status of a commercial company.

The Guide stipulates that there is no requirement for beneficiaries to be part of the same family. Any ”Identified” or ”Identifiable” beneficiaries (e.g., children, friends, descendants, unborn heirs) and public benefit entities (e.g., charities, non-profits) may be included — widening the applicability of the regime to philanthropic and multigenerational planning.

At the same time, a beneficiary that is a foreign public benefit entity which was not already a taxable person in the UAE may become subject to Corporate Tax as a Non-Resident Person as a result of the Family Foundation being fiscally transparent, for example, by virtue of having a nexus in the UAE.

Both UAE and foreign foundations, trusts or similar entities may qualify as a fiscally transparent Family Foundation if the following conditions are met:

• Be established for the benefit of ”Identified” or ”Identifiable” natural persons and/or a public benefit entity
• Engage only in asset/investment management and not in any Business or Business Activity
• Not be used for tax avoidance
• Ensure timely income distribution to non-exempt public benefit entities
• Be 100% owned and controlled in any tiered structure

The “no Business Activity condition” may appear challenging for some foundations.

To meet this condition, the foundation, trust, or similar entity must not engage in activities that would be regarded as a business if carried out directly by the founder or beneficiary.

Permitted activities are those which, if conducted by an individual, qualify as:

• Personal investment income,
• Real estate investment income,

since such activities are not considered a Business or Business activity and are not subject to tax under the Corporate Tax Law.

Example from The Guide

Foundation J owns residential units and a motel in the UAE.

Leasing residential properties generally does not require a licence – the “no Business Activity” condition is met.
Operating a motel requires a licence – this is considered a business. The condition is not met.

Conclusion: Since the Family Foundation conducts an activity regarded as a business, it cannot be recognized as fiscally transparent and is not eligible for the Family Foundation status.

The current tax regime allows for complex multi-tier structures, enabling juridical persons fully owned and controlled by Family Foundations to qualify for fiscal transparency.

A legal entity within the Family Foundation structure (for example, an SPV or LLC) can be recognized as fiscally transparent if all of the following conditions are met:

a. It is wholly owned and controlled by the Family Foundation (ownership condition):
- directly, or
- indirectly, through an uninterrupted chain of fiscally transparent entities
b. The Family Foundation itself is recognized as fiscally transparent
c. The mandatory criteria established by the Corporate Tax Law and Ministerial Decision are met
d. It does not conduct commercial activities.

If any of these conditions ceases to be met during a tax period, both the Family Foundation itself and all of its subsidiaries would lose their fiscal transparency.

In the case of indirect ownership and control, any link in the chain that is not fiscally transparent breaks the right of lower-tier entities to apply the Family Foundation’s transparency regime.

Furthermore, the ownership condition is not satisfied if the subsidiary is owned by two or more Family Foundations.

For the first time, the FTA introduces a formal compliance obligation:

• Family Foundations must register for Corporate Tax if applying for transparency
• Once approved, transparency applies from the tax period of application or the following
• Family Foundations must submit annual confirmations to FTA (within 9 months of year-end)
• Failure to meet any eligibility criteria (e.g., ownership, beneficiary definitions, distribution obligations) results in retroactive loss of transparency, and the Family Foundation becomes a taxable person from the beginning of that tax period