Recently some amendments were introduced vide Ministerial Decision No. (261) for UAE Partnerships including Family Foundations in line with Federal Law No. 47/2022. These changes create opportunities for businesses at the domestic and international levels, lessen compliance cost, and promote the UAE as an International Business Centre.
Corporate Tax, UAE and Family Foundations
Family Foundations are also recognized as Family Trusts having legal structure under the UAE Corporate Tax Law to administer and preserve the assets & wealth of families with the aim of:
- Assets & funds holding, investing and receiving
- Money transfers to social welfare organizations for charity or special purposes.
- Wealth succession for the beneficiaries.
What are Unincorporated Partnerships?
Unincorporated Partnerships or Agreements take the form of Share Agreements by two or more people/entities for the distribution of profits and losses.This obligation was frustrating, created unnecessary administrative hitches, and limited operational focus. The amended framework does not have this requirement, which means that businesses can focus on doing business. This also brings efficiency in terms of compliance with the tax administration of the UAE.
Family Foundations and Their Tax Treatment
- Juridical Persons and Transparent Entities Family Foundations (like some trusts) are legal entities treated as independent juridical persons, and family foundations are subject to UAE corporate tax by default. However, some Family Foundations prefer to be treated as unincorporated partnerships, which enables them to be deemed tax-transparent.
Classification
| Type | Tax Treatment |
| Juridical persons | Liable for UAE corporate taxes. Limited to legally registered entities, which are subject to UAE Corporate Tax. |
| Juridical persons | Liable for UAE corporate taxes. Limited to legally registered entities, which are subject to UAE Corporate Tax. |
| unincorporated partnerships | Income tax at the level of the beneficiaries or founders − not that of the foundation − so income of the foundation is not taxed at the corporate level. |
Read more: Exempt businesses under corporate tax in UAE
Key Tax Conditions For Family Foundation
Under Unincorporated Partnership for tax transparency, Family Foundation must comply with the following:
- Aim: The foundation shall be for the benefit of the immeasurable or identifiable persons and the entities of public benefit.
- Functions: Engage primarily in the management of assets and investments without strong taxable business activities.
- Timeline Distribution timeline: From the end of the relevant tax period, six months timeline must be follow up
Tax Exemptions
Individuals creating a Family Foundation may request tax exemptions in line with Article 17 of Federal Decree-Law No. 47 of 2022. Once approved by FTA:
- The income earned by the foundation is taxed at the level of individual beneficiaries according to their respective tax brackets.
- The FTA has also confirmed that the foundation itself is outside the jurisdiction of UAE corporate tax.
Benefits
| Benefit | Details |
| Corporate Tax Saving | Beneficiaries are ascertained tax on their income received but not taxed at the level of the foundation. |
| Asset Protection | Family wealth is exposed against risks such as lawsuits or creditors' claims. |
| Succession Planning | Helps to ensure that wealth is efficiently transferred to the selected beneficiaries under the interests of the founder. |
| Supporting Beneficiary | Can help to make donations or sponsorship to the areas of education, charity, and social welfare. |
Non-Qualifying Public Benefit Entities
Where a public benefit entity fails to comply with the criteria set out in Cabinet Decision No. 37 of 2023, that entity shall automatically be deemed a taxable person even if that entity derives benefits from a Family Foundation.
Establishing a Family Foundation
Procedures to Establishing a Family Foundation
Step wise guidance for a UAE Family Foundation:
- Drafting Objectives: Define the foundation’s objectives, beneficiaries, and structure of how the foundation attempts to achieve its goals.
- Registration: Obtain registration under the foundation in accordance with the law of the UAE.
- Application for Unincorporated Partnership Status: Apply for this status to take advantage of tax transparency benefits.
How is the Family Foundation dealt as an Unincorporated Partnership?
When a Family Foundation is requested to FTA, the classification is accepted as Unincorporated Partnerships, when approved: two out of three things are stated to happen:
- Beneficiaries are treated like partners in the partnership structure.
- Beneficiaries are given taxation status of reaching individuals for purposes of corporate taxation.
Condition and Requirement
| Condition | Requirement |
| Beneficiaries | Must be natural persons or public benefit entities qualifying for taxation relief. |
| Asset Management | The foundation will not engage in any activities that would warrant paying taxes while still managing assets for the purpose of planning their wealth. |
| FTA Application | Any appeal concerning the classification of a foundation as an unincorporated partnership has to be approved by the FTA. |
Foreign Partnerships and Tax Transparency
The reforms do not disregard the tax transparent status of foreign partnerships, making it easier for those in cross-border businesses. The partnerships that are transparent when a business is cross-border are treated the same way in the UAE.
Key Impacts
| Key Impact | Details |
| No Individual Approval Required | no longer require seeking individual approval for their tax arrangements at FTA. |
| Double Taxation Avoidance | Tax transparency ensures no double taxation of income for one entity, promoting the UAE as an ideal middle point for others. |
Taxation of Beneficiaries
Natural Persons as Beneficiaries
In the case of family foundations which are classified as unincorporated partnerships, the beneficiaries are regarded as real members of the partnership. They are required to:
- Mandatory corporate tax registration
- Abide by all the laws concerning taxation imposed on them.
Non-Resident Beneficiaries
Payments to non-resident beneficiaries are fully taxable under UAE corporate tax laws, per Article 12 and Cabinet Decision No. 49 of 2023.
Practical Implications
Reform Area and Direction
| Reform Area | Direction |
| Simplified Tax Framework | Reduction of administrative burdens for partnerships and foundations. |
| Double Taxation Avoidance | Ensures foreign partnerships are tax transparent and that their foreign residence does not subject them to dual taxation. |
| Management of Family Wealth | Charitable purposes,succession planning, and asset protection |
| Improved Compliance Flexibility | Appears to assist Family Foundations and beneficiaries in complying very easily. |
Conclusion
The changes made by Ministerial Decision No. (261) in the UAE take into account the specific requirements of Unincorporated Partnerships, Family Foundations, and Foreign Partnerships, improving transparency, simplifying compliance processes, and harmonizing with global standards. Such changes are beneficial to both businesses and individuals as these changes provide compliance with regulatory requirements while optimizing tax schedules within Dubai. Tax experts and practitioners are advised to make use of the reforms in a proper manner.
Frequently Asked Questions
What does Ministerial Decision No.261 entail?
It updates UAE tax law covering partnerships and Family Foundations, thus easing compliance requirements and improving the appeal of the UAE as an international business location.
How to define Unincorporated Partnerships?
Two or more persons/entities agree for profits & losses sharing to reduce the administrative burden and let the businesses concentrate on operations.
What is the taxation structure for Family Foundations in the UAE?
For corporate tax purposes, Family Foundations are regarded as legal entities but may elect to be treated as unincorporated partnerships, rendering them transparent for taxation purposes (taxed at the level of the beneficiaries).
What are the requirements on tax imposed on Family Foundation?
The family constitution must stipulate that distributions should not be made after six months, that the family does not provide annual income to identifiable individuals or public authorities.
How can Family Foundations be beneficial?
- Saving on tax outlays: Each of the beneficiaries within a FK that complies with the law will be individually taxed.
- Protection of assets: It secures expansive family riches.
- Managing succession: Effective wealth transfer.
- Philanthropy: Backs activity in the protection of vulnerable groups and education.
What are the consequences of a public benefit entity not complying with the criteria set forth in law?
It will be classified as subject to tax even when qualified to benefit from a Family foundation.
