Corporate Tax and Family Foundations in the UAE
What Is a Family Foundation?
A Family Foundation is a legal setup used to manage or protect family wealth across generations. It can be formed as a:
- Private trust
- Foundation under local or foreign law
- Similar legal vehicle used to hold, manage, or transfer assets for personal or charitable purposes
These structures are commonly used by high-net-worth families, business owners, and multi-generational households to organise wealth in a way that promotes long-term continuity and control. Instead of passing ownership through wills or informal means, assets are placed in a legally recognised vehicle.
Foundations often help reduce disputes between heirs, make inheritance planning easier, and separate personal and business assets. This can be especially useful where family-run enterprises operate across borders.
The UAE's Corporate Tax Law, specifically Article 17, acknowledges these structures and provides two clear paths for how they can be treated for tax purposes.
Two Ways to Be Treated for Tax Purposes
Family Foundations and similar entities can choose how they want to be taxed. There are two main options:
Option 1: Treated Like a Business (Taxable Person)
You can elect for your foundation or trust to be treated like a regular legal entity under the tax law. In that case:
- It must register with the Federal Tax Authority
- It will have its own Corporate Tax registration number
- It will be taxed at 0 percent on the first AED 375,000 of profit
- The remaining income will be taxed at 9 percent
This setup might make sense if the foundation has significant investments, runs income-generating activities, or wants to simplify group-level tax reporting.
It’s ideal for foundations that are structured more like investment arms or holding companies. If a foundation is actively generating revenue, through rent, interest, dividends, or operations, it may be easier to handle taxes at the entity level.
Option 2: Transparent Treatment (Like a Partnership)
Alternatively, a Family Foundation can elect to be treated like a transparent entity. That means:
- The foundation itself is not taxed
- Each beneficiary is taxed directly on their share of income
- The reporting obligations fall to the individual level
This approach can work well if beneficiaries are spread across different countries or are eligible for their own exemptions. It may also be useful when there is a desire to keep the foundation's accounting simple while assigning income responsibility to each individual.
Transparent treatment can make things more flexible for beneficiaries. If they reside in jurisdictions with tax treaties or different reporting obligations, taxing them directly might reduce the overall burden.
Note: The election for either option must be made properly and on time with the Federal Tax Authority. You can't change your mind easily once it's locked in for a tax period.
When Is a Foundation Exempt?
While most Family Foundations must choose one of the two tax treatment routes, some foundations may qualify for full exemption but only under specific conditions. A Family Foundation may be exempt if:
- It is 100 percent owned by an already Exempt Person (like a government entity)
- It is listed as a public benefit entity and used for nonprofit purposes
- It qualifies as a social security or pension fund
- It is set up purely for charitable reasons and approved by the FTA
These exemptions are meant to support entities that provide a broader social or governmental benefit. A foundation that fits into these categories must still register with the FTA, even if no tax is due. Registration helps track status and ensure transparency.
If a foundation holds charitable status but also engages in commercial activities, only the part used for charity might be exempt. This is important to track, especially where mixed-use funds are involved.
Examples of Foundations in Practice
Example 1: Private Family Office Foundation
A UAE-based family sets up a foundation to manage their business holdings and real estate. They elect to be treated as a Taxable Person. The foundation earns income from commercial property leases and dividends. It pays tax at 9 percent on profits above AED 375,000.
Example 2: Transparent Charitable Trust
A charitable trust is formed to provide scholarships and medical grants. It chooses to be treated transparently. The beneficiaries—students and medical recipients—are not taxed directly, and the trust’s income qualifies for exemption under the public benefit rule.
Example 3: Hybrid Family Structure
A family uses a trust to manage both commercial and philanthropic activities. Business profits are taxed under the Taxable Person option. Donations and grants are reported separately and fall under exemption rules. The family has separate reporting lines but benefits from both options.
Example 4: Passive Investment Vehicle
A small foundation is used to hold long-term equity investments and cash savings. The income is limited, and the family elects the transparent model so that each adult beneficiary reports only their portion. This avoids entity-level accounting.
Example 5: Charitable Endowment Fund
A wealthy couple creates an endowment to fund arts programs across the UAE. The foundation qualifies for exemption as a public benefit entity. Even though it earns passive income from property and donations, the entity is not taxed.
Why This Matters for Families
Foundations and trusts are often set up to protect family legacies, simplify inheritance, and plan for succession. But ignoring tax obligations, especially now that the UAE’s tax regime is active, can lead to surprises down the road.
Whether you’re holding real estate, running a family business, or distributing income to relatives, you need to understand:
- Who gets taxed (the entity or the people)
- Whether you need to register
- What elections or exemptions you can apply for
Choosing the right tax treatment early gives families peace of mind and avoids confusion later on.
It also helps avoid compliance errors. Many families believe trusts are tax-free by default. This is no longer true. Without clear action, your trust or foundation could end up non-compliant without realising it. Choosing the correct path now avoids backdated taxes and penalties later.
Families also need to consider their long-term planning. A foundation may look exempt today, but future income changes or legal updates could impact that. By structuring correctly, families can avoid needing to reorganise years down the line.
What Should You Do Next?
- Review the structure of your foundation or trust
- Confirm who the beneficiaries are and where they are located
- Decide if a transparent or taxable setup works better for your goals
- Check if you qualify for exemption under the law
You should also:
- Keep detailed documentation about income and distributions
- File the appropriate election with the FTA on time
- Prepare financial statements as required, even if no tax is due
Foundations must also keep good records. This includes:
- Governing documents
- List of current and former beneficiaries
- Statement of financial position
- Annual income statements
- Any legal agreements regarding distributions or asset transfers
This might feel complex, but tools like Tax Star simplify registration, tracking, and reporting. Whether your setup is simple or multi-layered, Tax Star helps keep you on track.
Frequently Asked Questions
Can a family foundation be exempt from Corporate Tax?
Yes, but only if it’s owned by an exempt person, serves a public benefit, or qualifies under FTA-approved nonprofit rules.
What’s the difference between a transparent and taxable treatment?
Transparent means the foundation isn’t taxed directly but rather its beneficiaries are. Taxable means the foundation is taxed like a business.
Can a trust be treated like a company under UAE tax law?
Yes. Trusts can elect to be treated as taxable persons and follow normal business tax rules.
Do family foundations need to register even if exempt?
Yes. Even exempt entities must register and comply with reporting requirements.
What happens if I don’t choose a tax treatment?
You may be taxed by default or miss out on beneficial reliefs. It’s better to make a clear election early.
Are distributions from a trust taxable to beneficiaries?
Yes, if the trust is treated transparently. Each beneficiary pays tax on their share.
How can I know which option is best for my foundation?
It depends on your goals, assets, and how income is shared. A tax adviser or software like Tax Star can help you model both paths.
