Are family foundations and trusts subject to corporate tax?

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.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above is not an official opinion of the Khaleej Times but a personal opinion of the writer. For any queries/clarifications, please write to the writer at mahar@kresscooper.com