Family foundations and trusts face distinct challenges and opportunities within the new Corporate Tax framework, emphasizing the critical need for effective tax planning and compliance management.
A profound grasp of the UAE Corporate Tax Law (Federal Decree-Law No. 47 of 2022) is essential for optimizing tax positions, ensuring compliance, and fostering long-term sustainability and growth.
Strategic evaluation of financial structures, operational practices, and investment strategies is imperative to align with the UAE Corporate tax framework while achieving overarching business goals.
This article aims to dissect the intricate nuances of family foundations under the UAE CT Law, offering comprehensive insights into their tax treatment.
Family Foundations and Trusts under UAE Corporate Tax Law
According to the UAE Tax Law, a Family Foundation encompasses entities such as foundations, trusts, or similar setups utilized for safeguarding and administering an individual or family’s assets and wealth.
While these entities may possess attributes of independent juridical persons, they typically aren’t established for commercial purposes but rather to manage beneficiaries’ savings and investments. Consequently, provisions within the Corporate Tax Law enable these foundations to be treated akin to unincorporated partnerships. This implies that the foundation’s existence can be disregarded, with the founder, settlor, or beneficiaries viewed as direct asset owners, thus exempting income or gains from Corporate Tax if the owner isn’t engaged in business activities.
To qualify for this treatment, certain conditions must be met, and the foundation must seek FTA approval to be treated as an unincorporated partnership. These conditions include:
– The Family Foundation serves the identified or identifiable natural persons’ benefit, a public benefit entity, or both.
– Its primary function involves managing assets or funds associated with savings or investment.
– The foundation doesn’t engage in activities that would constitute a business or business activity under the Tax Law if undertaken directly by its founder, settlor, or beneficiaries.
– Its primary purpose isn’t Corporate Tax avoidance.
– Additional conditions may be specified by the Minister.
Currently, the FTA hasn’t issued guidance on the application process for this treatment.
Tax Exemptions for Public Benefit Entities
The tax law extends exemptions to Qualifying Public Benefit Entities, encompassing entities dedicated to various charitable, educational, healthcare, environmental, and humanitarian causes, among others.
However, the exemption criteria are stringent, requiring that the entity’s income and assets be exclusively utilized to advance its established purpose. Additionally, no portion of the income or assets should benefit individuals not affiliated with a Qualifying Public Benefit Entity.
To qualify for exemption, entities must be officially listed in a Cabinet decision, indicating a specific date from which the exemption applies. This listing process mirrors the approach taken for VAT Designated Charities.
While these provisions offer valuable relief, their narrow scope may exclude certain organizations. For instance, schools with private ownership components may find it challenging to meet the exemption criteria.
Currently, there’s no clarity on how the FTA or Minister will compile the list of Qualifying Public Benefit Entities. Organizations seeking exemption should proactively engage with authorities to ensure inclusion
VAT Requirements for Family Foundations in the UAE
Family foundations may find themselves subject to VAT obligations even if they have no corporate tax liabilities. This distinction arises due to the differing definitions and criteria used in VAT and UAE CIT regulations.
Consider a scenario where a family foundation owns commercial real estate and generates rental income surpassing the Mandatory Registration Threshold of AED 375,000. In such cases, the family foundation must register for VAT purposes, regardless of its corporate tax status.
Our Insight
The provisions governing family foundations and unincorporated partnerships aim to ensure fairness and equity among involved parties. They guarantee that each partner in an unincorporated partnership is taxed proportionally to their stake, while individuals whose assets are managed through family foundations or trusts aren’t automatically treated as business entities. While these are positive steps, navigating tax accounting can be complex due to the varying structures and agreements underlying these entities.
It’s crucial to meticulously assess each aspect of the tax provisions to ensure compliance:
1. Verify that the entity aligns with the legal definition.
2. Submit any applications, such as requesting treatment as an unincorporated partnership, correctly and on time.
3. Maintain documentation and records supporting the applied tax treatment and declarations on tax returns. For instance, beneficiaries of family foundation income may need to demonstrate that assets aren’t held for business purposes. Partners in unincorporated partnerships require detailed records to support asset allocation, income, and expenses.
4. Conduct numerical simulations to compare the taxation of partnership profits in the hands of individual partners versus taxation as an unincorporated partnership.
5. Exercise caution with charity and public interest body relief, as eligibility is stringent and exemptions are narrowly applied.
For further guidance on these matters or any other tax-related issues such as corporate tax registration or VAT registration, please reach out to our corporate tax team in Unicorn Global Solutions. Text us on WhatsApp or call us today to get started.
