Emirates: Family foundations and trusts are typically established for philanthropic purposes and to protect and manage the assets of individuals or families for future generations. Business and business activities are not the primary focus of these entities, but they do the business and related activities if directly related to or are aimed at fulfilling the purpose for which the foundation and trust were established.

The word “philanthropic purpose” mentioned above means investing time, energy, resources etc. for charitable and welfare purposes like as eradicating poverty, promoting education, enhancing the standard of living of human beings and other non-profit objectives like environmental, religious, scientific, artistic, cultural, athletic, healthcare, humanitarian, animal protection etc. which align with the interest of the family or trust creator. Managing and protecting assets means using or distributing the assets based on the contract terms agreed between the parties.

The family foundations and trusts perform various activities like receiving, holding, investing, disbursing, or otherwise managing funds and assets associated with savings or investments for the interest of the individual beneficiaries or to achieve a charitable purpose.

There is a difference between the family foundation and trust, but both aim to achieve the same non-profit objectives. In the family foundation, assets are transferred to the foundation and managed by the board, while in the trust, assets are transferred to the nominal owner (trustee), and the trustee ensures that the assets have been passed on to the beneficiaries according to the trust creator's wishes. Since both have the same purpose of establishment, so in corporate tax law (the law) issued by the government of the UAE, the foundation, trust and any other similar entity that meets the related criteria have been defined as a “family foundation.”

As defined in the law, the family foundation means “Any foundation, trust or similar entity that meets the conditions of Article 17 of this Decree-Law”.

Article 17 of the law requires that the foundation, trust and similar entity were established for the benefit of natural persons, or the benefit of a public benefit entity, or both. In addition, their principal activity is to receive, hold, invest, disburse, or otherwise manage assets or funds associated with savings or investment. Moreover, these entities are not conducting any business or business activity, and none of them was established to avoid corporate tax. Furthermore, they meet any other condition imposed by the Minister of Finance (MoF).

In light of the definition and requirements of article 17 of the law, we can establish that any foundation, trust or similar entity that meets the given criteria should be named a “family foundation”, and such foundations, trusts, and similar entities (hereinafter referred as “family foundation”) will have the same corporate tax treatment under the name of the family foundation.

Generally, family foundations that are incorporated, established and registered in the UAE have a separate legal personality from their family members/trust creators and meet the definition of a juridical person as defined in the UAE CT law except for a few trusts (like trusts established in DIFC or ADGM) that have only contractual relationship between the persons and such trusts do not have legal personalities. Where the trusts have been created only through the contractual relationship, it will be treated as transparent for UAE corporate tax purposes, and the income of such trusts will be taxable in the hands of the relevant parties.

By default, the family foundations incorporated in the UAE would have been subject to the CT being a juridical person established in the UAE, and their worldwide income would have been subject to CT, but keeping in view their non-profit nature of the activity, special provisions have been included in the law.

Under article 17 of the law, as a special case, the family foundation has been given the option to be treated as an unincorporated partnership if the family foundation meets the criteria mentioned above and given in article 17 of the law. To avail of the option to be treated as an unincorporated partnership, the family foundation can apply to the Federal Tax Authority (FTA).

After the approval of the FTA, it will be treated as an unincorporated partnership from the commencement of the tax period in which the application is made, or from the commencement of a future tax period, or any other date determined by the FTA. Once the family foundation gets the status of an unincorporated partnership, all related provisions of the law that apply to the unincorporated partnership will also apply to the family foundation.

In the law, one point needs attention and it pertains to the family foundation. The criteria that have been applied to define the foundation, trust or similar entity as a family foundation; the same yardstick has been utilised for the family foundation to opt as an unincorporated partnership. It raises one question; is the family foundation itself an unincorporated partnership? We need more clarity on this. In the future, any clarification provided by FTA will be helpful to avoid this confusion and give us a thorough understanding of the concept.

In a nutshell, foundations, trusts and similar companies incorporated and established in the UAE for charitable purposes and to protect and manage assets of individuals and families, if not opted or opted for unincorporated partnerships but not approved by the FTA, should comply with the law.