UAE foundations: new tax dynamics with UAE corporate tax
The recent implementation of Corporate Tax (CT) in the UAE marks a pivotal shift in wealth management strategies, especially for family foundations. These entities, traditionally pivotal in succession planning and asset protection, now encounter new tax implications under the CT framework. Leevyn Isabel, Commercial Director – Middle East, provides an insightful exploration into the nuanced tax treatment and highlights critical considerations to navigate potential challenges effectively.
1. The importance of transparency
A key benefit for UAE foundations is their ability to qualify as fiscally transparent entities, exempting the foundation itself from the UAE's CT. Instead, the tax responsibility transfers to the beneficiaries who receive income/benefit from the foundation's assets. This fiscal transparency is perfectly aligned with the core objectives of family foundations, which typically focus on managing personal wealth for legitimate purposes such as succession planning and asset protection.
However, this transparency is conditional and requires careful compliance. To qualify, the foundation must be established with the primary aim of benefiting identifiable individuals or entities serving the public good, rather than merely serving as a vehicle for tax evasion. Furthermore, the foundation must refrain from engaging in what is classified as "business activities" under the UAE CT Law. Adhering to these stipulations ensures that the foundation fulfils its intended role and remains clear of potential exploitation in tax avoidance strategies.
2. Navigating the fiscal landscape
The fiscal transparency of a qualified family foundation shifts the tax responsibility directly to the beneficiaries. This structure is advantageous as income such as personal investment returns and real estate rentals typically falls outside the scope of UAE CT, thanks to specific exclusions. However, the tax implications for beneficiaries hinge significantly on their tax residency status. UAE residents benefit from minimal tax consequences, while non-UAE residents must carefully assess and address potential tax liabilities in their respective home countries, necessitating a thorough tax obligation analysis.
3. Safeguarding transparency
The privilege of transparency is conditional and requires vigilant adherence to the foundation's non-commercial objectives. Deviation towards commercial activities can strip a foundation of its transparent status, subjecting it to standard corporate taxation. This shift not only forfeits the tax advantages but may also lead to substantial tax liabilities. To avoid such pitfalls, it is important to continuously monitor the foundation’s activities and ensure strict compliance with its foundational goals.
4. Understanding additional tax obligations
While family foundations may enjoy protection from CIT under certain conditions, this does not extend to VAT. Particularly, foundations that own and lease commercial properties may need to register for VAT once their transactions exceed the stipulated threshold. A comprehensive grasp of VAT regulations is crucial for effective tax management, ensuring that all fiscal responsibilities are met without compromise.
5. ESR and navigating future uncertainties
The UAE Economic Substance Regulations (ESR) introduce an additional compliance dimension for foundations. Although most foundations are not classified as licensees under ESR and thus are exempt from filing requirements, those that operate as holding entities generating passive income may encounter minimal reporting obligations. The landscape of ESR is, however, subject to change, with potential amendments or even a repeal possible in the future. It is imperative for foundations to stay abreast of any regulatory updates to ensure ongoing compliance with ESR.
6. International tax considerations
Foundations that hold assets internationally must navigate a more complex tax environment. Income from such assets may be taxed in the countries where they are located, and although tax treaties between the UAE and other nations may exist, the transparent nature of family foundations often precludes them from claiming double taxation relief for taxes paid. Additionally, withholding taxes on foreign income could represent a significant unrecoverable expense. Effective management of international tax liabilities requires meticulous planning and may necessitate consultation with experts in international tax law.
How can Ocorian help?
Navigating the complex tax landscape for UAE foundations requires a deep understanding of transparency rules, beneficiary tax implications, VAT liabilities and the evolving ESR.
Ocorian's UAE domestic and global teams are committed to strategically assessing existing structures, aligning with international tax standards, fortifying economic substance and enhancing corporate governance best practices.
For more information contact our private client team today.
