UAE Family Foundations and Corporate Tax

UAE Family Foundations and Corporate Tax

Memorandum for principals, family officers and their advisers

1. Purpose and scope

This memorandum examines the tax treatment of UAE foundations under Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, as amended (the “CT Law”), with particular attention to the transparency election available to Family Foundations under Article 17, its extension to underlying entities by Ministerial Decision No. 261 of 2024, and the ongoing obligations specified in particular by the Federal Tax Authority.

It is intended for principals and family officers who hold, or are considering establishing, a foundation registered in the ADGM, the DIFC or the RAK ICC. Its perspective is deliberately inter-jurisdictional: a UAE foundation that is tax-transparent locally may remain opaque in the beneficiaries’ state of residence, and the analysis performed in that state will often determine whether the structure achieves the intended result.

This memorandum is general in scope and is not a substitute for a written, fact-specific analysis of a particular situation.

2. Default rule under the CT Law

Under Article 11 of the CT Law, juridical persons incorporated, established or recognised in the United Arab Emirates – including foundations established under the ADGM Foundations Regulations 2017, as amended, the DIFC Foundations Law (DIFC Law No. 3 of 2018), as amended, and the RAK ICC Foundations Regulations 2019, as amended – are in principle classified as Taxable Persons. They determine their Taxable Income under the ordinary rules of the CT Law.

The 9% rate applies in principle to Taxable Income exceeding the AED 375,000 threshold for financial years beginning on or after June 1, 2023. This rule must, however, be read together with the specific UAE regime: a foundation incorporated in a free zone may need to be assessed under the Qualifying Free Zone Person regime, and certain income may be excluded from Taxable Income, including certain dividends and income from qualifying participations.

Absent the election, the issue is therefore not only to avoid a nominal 9% rate, but also to avoid taxation and compliance at the level of a vehicle that, economically, often serves as a simple family wealth-holding wrapper. Investment income – dividends, interest, rents and capital gains – must be characterised under the CT Law before any conclusion is reached on its effective taxation at foundation level.

3. The Family Foundation election (Article 17)

Article 17 of the CT Law allows a Family Foundation to apply to the Federal Tax Authority to be treated as an Unincorporated Partnership, that is, to benefit from tax transparency for Corporate Tax purposes. Where the application is approved, income, gains, assets, liabilities and expenses are allocated to the beneficiaries under the applicable rules, and no Corporate Tax is due at the level of the foundation itself.

The election is subject to five cumulative conditions:

(i) the foundation must have been established for the benefit of identified or identifiable natural persons, for the benefit of a public benefit entity, or both;

(ii) its principal activity must be to receive, hold, invest, disburse or otherwise manage assets or funds associated with savings or investment objectives;

(iii) it must not conduct any activity that would have constituted a Business or Business Activity if carried out directly by its founder, settlor or one of its beneficiaries;

(iv) the foundation must not have as its principal purpose the avoidance of Corporate Tax; and

(v) it must satisfy any additional condition prescribed by the Minister.

Condition (iii) is the one most often underestimated. A distinction must be drawn between the mere wealth-holding of assets, including shares in operating companies, and the direct or indirect conduct of a Business or Business Activity by the foundation or by an underlying entity. The risk area arises where the foundation or transparent holding vehicle no longer merely holds and administers assets, but becomes involved in operations, provides services, charges fees, employs operational staff or participates in the commercial management of the group.

Condition (iv) must be read together with the general anti-abuse logic of the CT Law. A wealth-structuring arrangement may legitimately pursue family governance, asset protection and succession continuity; it becomes fragile where Corporate Tax savings are presented as the principal motive or where the arrangement produces a tax advantage contrary to the object of the CT Law.

4. Underlying entities – Ministerial Decision No. 261 of 2024

Ministerial Decision No. 261 of 2024, which replaced Ministerial Decision No. 127 of 2023, extended the Family Foundation regime on a practically decisive point: a juridical person wholly owned and controlled by a Family Foundation treated as an Unincorporated Partnership may itself apply to be treated as an Unincorporated Partnership.

This extension requires an uninterrupted chain of entities that are themselves wholly owned and controlled, each treated as an Unincorporated Partnership in accordance with the CT Law. A break in ownership, control or transparency at any level of the chain may compromise the tax alignment of the whole structure.

Before MD 261/2024, an ad hoc underlying entity holding the family investment portfolio remained a Taxable Person even where the upper-tier foundation had elected for transparency, so that the consolidated structure offered only limited effectiveness. Since MD 261/2024, a chain of wholly controlled holding entities can be aligned on a transparent basis, subject to ongoing compliance and to satisfaction of the Article 17(c) test at each level of the chain.

Where the structure includes public benefit entities among the beneficiaries, the additional conditions provided by MD 261/2024 must be verified separately, including the absence of Taxable Income at the level of the relevant entity or the distribution of the relevant income within the required time limits, depending on the configuration.

The election is neither automatic nor definitive. Each entity must submit its own application, satisfy the conditions on an ongoing basis, and the election remains revocable or may cease to have effect if circumstances change.

5. What the election does not eliminate

An approved Family Foundation election changes the tax classification of the structure for Corporate Tax purposes; it does not remove the compliance discipline surrounding the foundation and its underlying entities.

• prior registration with the FTA for Corporate Tax purposes, the election changing the applicable regime but not the need to have a tax registration where required;
• filing the required annual confirmation after approval of the election, within the applicable deadlines;
• maintaining accounts and documentation sufficient to demonstrate continuous compliance with Article 17 and MD 261/2024;
• classification and reporting obligations under the Common Reporting Standard and FATCA, foundations frequently being analysed as Reporting Financial Institutions depending on their activity and management arrangements;
• obligations relating to the identification of the Ultimate Beneficial Owner under the applicable UAE regulations;
• the VAT and Excise regimes, which operate independently of Corporate Tax;
• periodic review of anti-abuse consistency, particularly where assets, beneficiaries, distributions or governance evolve.

Important point: once the application has been approved, the Family Foundation is not required to file a Corporate Tax Return in its own name. This absence of an annual CT return should not, however, be confused with the absence of obligations: registration, annual confirmation, documentation and ongoing review of the conditions remain decisive.

Loss or withdrawal of the election can create practical difficulties: reconstructing Taxable Income at the relevant level, treatment of prior periods, updating the banking/CRS classification, documenting distributions made during the transparent period and analysing the effects for beneficiaries. The administrative footprint therefore remains substantial and must be factored into any comparison with an alternative organisation.

6. Foreign dimension

A UAE foundation treated as transparent for Corporate Tax purposes is not, solely by reason of that local classification, treated as transparent in the beneficiaries’ state of residence. The classification made by the state of residence is autonomous and follows its own rules. Outcomes range from mirror transparency, which is relatively rare, to complete opacity combined with anti-deferral regimes applied to the beneficiaries.

For beneficiaries who are French tax residents, by way of illustration:

Article 123 bis of the CGI – its application must be examined carefully, but it is not purely mechanical. It requires identifying the nature of the economic or control rights held in the foundation, the composition of the assets, any possible assimilation to a trust or comparable institution, and the preferential nature of the foreign tax regime by comparison with the tax that would have been due in France under the French rules applicable to a comparable entity. The UAE nominal rate of 9% is a warning indicator, but the analysis must be conducted under the test in Article 238 A of the CGI, and not by a simple comparison with French personal taxation of investment income.

Articles 792-0 bis, 1649 AB and 1736 IV bis of the CGI – a UAE foundation should not be automatically assimilated to a trust for French purposes. However, where it organises the placing of assets by a founder under the control of administrative bodies for the benefit of determined or determinable persons, the risk of functional assimilation to a trust or comparable institution is significant. This analysis must be carried out on the basis of the constitutional documents, the actual powers of the founder, council and guardian/protector, the rights of the beneficiaries and the effective governance practice. In the event of assimilation, forms 2181-TRUST 1 and 2181-TRUST 2, as well as the penalties specific to trust reporting obligations, must be addressed expressly.

Article 750 ter of the CGI – inheritance and gift taxes must be assessed by reference to a taxable base determined by the residence of the deceased or donor, the residence of the heirs, donees or beneficiaries, and the direct or indirect location of the assets. The classification of the foundation does not eliminate the French succession analysis where French connecting factors exist.

Articles 990 D and 990 E of the CGI – the annual 3% tax on French real estate held directly or indirectly by legal entities must be analysed not only by reference to the scope of Article 990 D, but also by reference to the exemptions in Article 990 E, in particular the thresholds for French real estate holdings, the location of the registered office, the nature of the entity and its ability to provide the required information on holders or beneficial owners.

Treaty access – the France-UAE tax treaty of July 19, 1989, as amended by the protocol of December 6, 1993 and by the BEPS Multilateral Instrument (MLI), must be read with caution. Article 4 contains an asymmetric definition of residence: for France, it follows a liability-to-tax approach by reason of domicile, residence, place of management or similar criteria; for the United Arab Emirates, it refers to persons domiciled, established or having their place of management in the UAE. A foundation treated as transparent in the UAE may therefore raise separate issues of personhood, residence, beneficial ownership, transparency and the principal purpose test. Where treaty access is an objective of the structuring, the Family Foundation election must be tested before implementation rather than afterwards.

Similar issues arise under the anti-deferral regimes of the United Kingdom, Germany, the Netherlands, Italy, the United States and other jurisdictions aligned with OECD standards. The general principle is that the analysis in the beneficiaries’ state of residence must be conducted in parallel with the UAE analysis; its outcome may neutralise – and in some configurations contradict – the UAE election.

7. Use cases and contraindications

The Family Foundation election is generally well suited:

• wealth-holding structures holding passive financial investment assets, where the beneficiaries are not resident in jurisdictions applying aggressive anti-deferral regimes;
• governance vehicles whose principal purpose is succession clarity, family governance and continuity, rather than tax savings in the narrow sense;
• the consolidation of legacy offshore vehicles under a regulated UAE umbrella, provided that the analysis in the state of residence supports the migration and the exit costs from the legacy structure are contained;
• holding companies where the foundation or the underlying entity is limited to passive and documented holding, without any commercial activity of its own.

It is poorly suited, or even contraindicated:

• structures whose beneficiaries are resident in jurisdictions with effective anti-deferral regimes and hold substantial economic interests;
• operational activities requiring the foundation or its transparent subsidiaries to conduct a Business Activity within the meaning of the Article 17(c) test;
• structures intended to address forced heirship constraints, whether under French law or comparable regimes in other countries, without a parallel succession law analysis under the personal law of the founder and the beneficiaries;
• structures heavily exposed to French real estate, because of the 3% tax under Articles 990 D and 990 E of the CGI, French real estate wealth tax (IFI), inheritance and gift taxes or foreign withholding taxes that a transparent entity may no longer be able to neutralise through treaty relief.

Indicative orientation matrix:

8. Legacy offshore structures – the restructuring question

It has become common to describe offshore structures predating 2023 as obsolete since the introduction of UAE Corporate Tax. The proposition is partly correct but materially incomplete. Any restructuring decision must examine:

• latent gains and exit costs in the jurisdiction of origin, including stamp duty, potential capital gains and corporate-level taxation upon liquidation;
• the place of effective management of existing entities, which may already have de facto moved to the UAE and determines the realistic alternative;
• the consequences of substitution in the beneficiaries’ state of residence – in some configurations, replacing an old structure with a new UAE vehicle is itself a triggering event;
• the AML, CRS and UBO consequences of the migration, as well as continuity of beneficial ownership documentation, particularly for banking relationships;
• the consequences of any loss of treaty access or change of classification in the source state of the income.

The conclusion is rarely binary. A measured analysis of the existing structure, of the tax consequences of maintaining it compared with migrating it in the state of residence, and of the documentary cost of transition, must precede any decision.

9. Recommended process and compliance calendar

For clients with an existing UAE foundation, we recommend a documented review covering:

• confirmation of eligibility for the Family Foundation election against each of the Article 17 conditions;
• assessment of the underlying entities with a view to aligning them under MD 261/2024;
• parallel analysis in the state of residence of each beneficiary, including anti-deferral, succession, reporting and treaty dimensions;
• the compliance posture on CT registration, annual confirmation, CRS, FATCA, UBO and accounting records;
• documentation of the economic, wealth-planning and governance motives in a form capable of being relied upon in the event of an audit, both in the UAE and in a beneficiary’s state of residence;
• updating bank documents, tax classifications and internal registers where transparency is obtained or withdrawn.

For clients considering a new structure, the same review should be conducted before incorporation, in light of the relevant family composition and asset profile. A foundation that poorly fits the beneficiaries’ objectives is materially more difficult to unwind than to design correctly at the outset.

Indicative compliance calendar:

10. Reservations and engagement

This memorandum is general in scope and does not constitute legal or tax advice on any particular situation. The UAE Corporate Tax regime is recent and continues to evolve; French anti-abuse rules – and those of other jurisdictions of origin – are evolving in a comparable way. Any decision to establish, restructure or retain a UAE foundation must be based on a fact-specific analysis addressed in writing to the principals concerned.

Hervé Israel International acts as an independent international tax adviser on the structuring, review and defence of cross-border arrangements involving the United Arab Emirates, France and the Europe-Gulf corridor.