Measuring the impact of Ministerial Decision 261 of 2024 on UAE corporate tax

The introduction of the UAE corporate tax brought with it a period of significant uncertainty for family businesses, particularly those utilising foundations with holding companies for real estate ownership. Prior to Ministerial Decision No. 261 of 2024, a family foundation with an underlying UAE holding company was not exempt from UAE corporate tax even if the beneficiaries were UAE residents. The tax implications surrounding these structures were shrouded in ambiguity, leaving families struggling to assess and mitigate potential risks.

What was the landscape like before Ministerial Decision 261?

Many UAE-based families had adopted sophisticated structures involving foundations, often established in jurisdictions like the Abu Dhabi Global Market (ADGM) or the Dubai International Financial Centre (DIFC), coupled with onshore holding companies. These holding companies typically held valuable real estate assets. The intent was often to facilitate succession planning, asset protection, and streamlined management.

However, the application of corporate tax to these structures presented numerous challenges:

• Lack of clarity on foundation tax treatment: The tax treatment of foundations, particularly those with underlying holding companies, was unclear. Were they considered taxable entities? Were distributions to beneficiaries subject to tax?
• Ambiguity regarding holding company income: The tax implications of rental income and capital gains from real estate held by holding companies within these structures were also uncertain.
• Transfer pricing concerns: Real estate transactions between related entities within the foundation-holding company structure raised concerns about transfer pricing compliance.
• Free zone implications and onshore interaction: When foundations were located in free zones and holding companies onshore, the interactions between these two entities created a source of tax uncertainty. The precise definition of what a qualifying free zone person is, and how that interacts with the onshore holding company, created large areas of concern.
• Risk assessment and mitigation challenges: The lack of clarity made it extremely difficult for families to accurately assess their tax risks and implement effective mitigation strategies.

What is the impact of Ministerial Decision 261 of 2024?

Defining the tax treatment of foundations:

1. Allows juridical persons wholly owned and controlled by family foundations to apply to the Federal Tax Authority to be treated as unincorporated Partnerships. This is particularly relevant for holding companies owned by Family Foundations, enabling them to achieve tax transparency.

2. This allows for the tax to be passed to the natural beneficiaries of the parent family foundation.

3. It provides clarity around when family foundations are treated as unincorporated partnerships and the conditions that must be met.

Clarify transfer pricing considerations: 

By explaining the tax treatment of partnerships and family foundations, the decision reinforces the importance of having the right transfer pricing documentation in place.

Providing clarity on free zone interaction: 

The decision provides clarification on how free zone entities interact with onshore entities, especially in the context of foundation and holding company structures.

Enabling enhanced risk management: 

By providing greater clarity, the decision will empower families to better assess their tax risks and implement effective mitigation strategies, fostering greater confidence in their financial planning.

What actions are families taking following the issuance of Ministerial Decision No. 261 of 2024? 

In response to the issuance of Ministerial Decision No. 261 of 2024, families are taking the following actions:

• Comprehensive review of existing structures: Families are conducting thorough reviews of their existing foundation-holding company structures to assess their compliance with the new regulations.

• Seeking expert tax advice: Families are engaging tax advisors specialising in UAE corporate tax to interpret the implications of the decision and develop tailored tax planning strategies.

• Restructuring and optimisation: Based on the decision's guidance, families may restructure their operations to optimise tax efficiency and ensure compliance.

• Strengthening documentation and record-keeping: Families are enhancing their documentation and record-keeping practices to support their tax positions and facilitate compliance.

• Proactive engagement with tax authorities: Families are engaging with tax authorities to seek clarification on specific issues and ensure their understanding of the regulations.

How can Ocorian help?

Ministerial Decision No. 261 of 2024 is a pivotal development in clarifying the UAE's corporate tax framework, particularly for families using foundation-holding company structures to own real estate. By resolving earlier ambiguities, the decision empowers families to make informed choices, manage tax risks, and support their businesses’ long-term sustainability. Engaging qualified tax professionals is crucial to navigating these new regulations and ensuring full compliance.

Ocorian is fully licensed as a corporate service provider in both the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM). We offer comprehensive services—including corporate structuring, special purpose vehicles (SPVs), private client support, and the establishment and administration of foundation vehicles—customised to meet each client’s needs and objectives. Our team can also provide qualified Council Members and Directors, and we support a range of structures such as trusts, private trust companies, and private funds. 

Ongoing support is central to our approach. We maintain regular communication with clients, holding council and board meetings to discuss all aspects of their structure and evolving family objectives. This continuous engagement helps ensure alignment and effective governance throughout the lifetime of the structure.

Ocorian serves second- and third-generation families across the Middle East, including those with complex, multi-jurisdictional investments. Many of our clients have been with us for over 25 years, a testament to our consistent service and the strong relationships developed through understanding each family’s unique dynamics and goals.

Ocorian is uniquely positioned to help families navigate the changing UAE corporate tax landscape. To learn more, reach out to the team.