In the United Arab Emirates, foundations have become an incredibly popular structure established for wealth management, succession planning, and asset protection. However, individuals, corporates, and families have one question in mind when setting up a foundation: Does a foundation have to pay taxes in UAE?
The tax treatment of foundations has become more complex since the UAE Corporate Tax (CT) law was introduced in 2023 and went into full force in 2024. This has led to careful analysis and compliance. Let’s understand this better. Read on for more detail –
What Is a Foundation?
High-net-worth family foundations in the UAE, which is a legal personality is established to safeguard and administer assets for the benefit of designated identifiable beneficiaries, to preserve their fortune over several generations in the United Arab Emirates.
Foundations frequently have an own legal identity and involve a founder, a council or board, and beneficiaries, in contrast to trusts, which might be contractual or statutory. The United Arab Emirates’ mainland or free zones like the DIFC, ADGM, or Ras Al Khaimah International Corporate Centre (RAKICC) are viable options for their establishment.
Understanding UAE Corporate Tax Laws and Its Impact on Foundations
Does a foundation have to pay taxes in UAE? To understand this, you have to go through the new corporate tax laws. Under UAE Federal tax authority – Federal Decree-Law No. 47 of 2022, the UAE implemented Corporate Tax as a component of its international tax obligations and diversification initiatives.
It applies to all taxable individuals, including foundations as legal entities. For many firms in the UAE, with the exception of oil companies and foreign banks, this represents a change from the former zero-corporate tax regime.
Although family foundations must automatically adhere to this tax regime, they can get tax transparency or exemptions by fulfilling specific requirements set forth by the Federal Tax Authority (FTA) of the United Arab Emirates.
In contrast to active commercial business activities, foundations enjoy the advantages of particular regulations created to support their specific function as personal wealth management vehicles.
Fiscal Transparency and Corporate Tax Registration
Here is a guide on the taxation system, registration, and fiscal transparency that you should know for all types of foundations.
Requirement for Corporate Tax Registration
Regardless of whether they expect taxable income, all juridical entities, including foundations, are required by the UAE legal landscape and Corporate Tax Law to register for corporate tax within three months after incorporation or licensing. Penalties may be imposed for nonregistration or any kind of avoidance.
Family Foundations’ Option for Fiscal Transparency
The ability for family foundations to choose to be regarded as fiscally transparent organizations is a fundamental component of the tax system in the United Arab Emirates. Accordingly, the beneficiaries get the tax responsibility directly based on their ownership shares or entitlements, even though the foundation itself is exempt from corporate tax. After receiving income or benefits from the foundation, beneficiaries must pay taxes.
Foundations must meet stringent requirements to be eligible to be treated as fiscally transparent, such as:
- Possessing distinctly identified public benefit organizations or natural person recipients.
- Mainly taking part in management, investment, and assets or funds holding operations.
- Not engaging in business or commercial activity as that term is defined by UAE corporation tax law.
- Not making tax evasion their primary goal.
- Fulfilling the guidelines for allocating revenue to public organizations.
For family foundations to be treated as transparent, the foundation must formally apply to the FTA and meet all qualifying requirements. Fiscally transparent entities are subject to regular corporation tax at the usual rate and lose their transparent status if it doesn’t comply.
Tax Scenarios for Foundations in UAE
Different tax scenarios for a foundation answers the question – does a foundation have to pay taxes in UAE. Here are the different tax structures for foundations.
Foundations Are Considered Independent Taxable Organizations
Under UAE corporate tax law, a foundation is regarded as a taxable person if it is not or is unable to qualify for fiscal transparency. When its taxable income is over the deductible threshold (currently AED 375,000*), it is required to calculate and pay corporate tax at the regular rate, which is typically 9%.
Some examples of these taxable activities are:
- Commercial revenue from leasing, trading, or providing services.
- Earnings from investments or dividends that are not exempt.
- More business-related earnings come from the United Arab Emirates.
Foundations Exempt From Taxation
The following foundations might not be subject to corporate tax in the UAE:
- Foundations that are fully owned by the government or by exempt individuals would be considered free from tax liabilities.
- The UAE government recognizes public benefit organizations as separate legal personalities to receive tax avoidance.
- Pension funds or social security.
- Foundations that have been lawfully authorized and created only for philanthropic or public benefit reasons.
- To be eligible for exemptions, the foundation still needs to fulfill its registration and reporting requirements.
Considerations for Dividends and Capital Gains
Dividends received by foundations are typically tax-exempt under the UAE tax system. This promotes foundation-based investment models. Additionally, putting real estate assets in foundations may offer benefits for capital gains and rental income taxes, even if the beneficiaries may have to pay taxes on the gains and income when they are given.
Effect on Beneficiaries
Beneficiaries are regarded as taxable individuals who must disclose and pay corporate tax on their portion of the foundation’s revenue if the foundation has chosen fiscal transparency or is regarded as an unincorporated partnership. Tax responsibilities differ depending on whether the beneficiaries are public benefit organizations or natural people.
Beneficiaries who are not based in the UAE should think about the regulations in their own country regarding the disclosure of income from UAE foundations, particularly in light of any cross-border tax treaty ramifications.
Obligations for Compliance and Reporting
Enrollment and Submission
For corporation tax purposes, foundations must register and send their application to the FTA within the allotted time frames. Penalties are imposed for noncompliance. Even foundations that are eligible for exemptions or fiscal transparency must submit the necessary tax returns or disclosures.
Annual Statements and Openness
Foundations that receive tax-transparent treatment are required to keep thorough records of their beneficiaries, operations, and distributions in addition to submitting yearly reports to the FTA.
Steps to Take in Practice for Foundations
To prevent penalties and maximize tax positions, it is essential to use tax consultants to assure compliance with evolving legislation, apply promptly for tax transparency status, maintain clear beneficiary records, and use precise accounting procedures.
Final Takeaway
All in all, it can be said that foundations in the UAE do have tax implications. However, with compliance and detailed knowledge, one can enjoy favorable tax treatments like fiscal transparency or exemption.
All you need is guidance and advice from expert business consultants who can make the complicated tax system feel hassle-free. Xpert Advisory is one such name in the UAE that you can trust when it comes to a foundation setup and its tax regulations. Contact our experts if the entire new tax policy feels overwhelming!
FAQs
Can Foreign-Owned Foundations Enjoy the Same Tax Transparency As Those Owned by Locals?
Yes. If they meet the FTA’s requirements, foreign-owned foundations founded in the UAE’s free zones or on the mainland may apply for fiscal transparency.
What Impact Does the UAE Corporate Tax Have On Foundations’ Capacity To Own And Administer Foreign Assets?
If a foundation meets the requirements for a taxable person, it is nevertheless liable for UAE corporation tax on its foreign assets. However, under UAE law or international tax treaties, income from outside sources could qualify for credits or exemptions.
Do Family Foundations In Free Zones Receive Different Tax Treatment Than Foundations On The Mainland?
The taxation of family foundations in DIFC and ADGM zones under UAE corporate tax legislation is in line with federal regulations, even if they can take advantage of customized legal structures and confidentiality. They can apply for tax transparency or exemptions similarly, but compliance requirements may apply.
