Crafting Wealth Legacy with Strategic Tax Planning: UAE Family Foundations

Trust, Family Foundation, Will and Family Office are means and tools for wealth preservation, succession planning and tax neutrality, both for individuals and business families. Their purpose can be charitable and non-charitable.

On the face of it, both Trust and Family Foundation serve the same basic purpose of wealth preservation and succession planning, but there are still legal and commercial framework differences.

Trusts are often favored for their flexibility and the ability to create detailed estate planning structures that can adapt to various family needs and legal requirements.

Family Foundations are ideal for families looking to establish a legacy institution that can manage and preserve wealth across generations, often with a focus on philanthropic activities.

Introduction

Since the introduction of corporate tax in the UAE there's been significant interest in 'family foundations,' particularly among business families. But what exactly are they, and how do they fit into the realm of tax planning and succession?

?Family Foundations

In simple terms, a family foundation is established to safeguard and manage the wealth of individuals or families engaged in successful businesses. It serves as an alternative to traditional wills, particularly for succession planning purposes.

?Fiscal Transparency and Application Process\

A natural person’s employment income and personal investment income are not intended to be within the scope of Corporate Tax. Natural persons use different structures to manage their personal wealth and investments for asset protection, succession and other reasons, which may include, for example, using a contractual trust, a private trust company or a foundation to hold and manage personal assets and investments.

While some structures are treated as fiscally transparent, certain types of trusts and foundations with separate legal personality are treated as juridical persons and subject to corporate tax. This includes foundations established in ADGM or DIFC. However, if these entities are merely used to hold and manage personal assets, this can lead to inconsistent tax treatment compared to natural persons holding the assets directly. To mitigate unintended tax consequences, family foundations can seek approval from the FTA to be treated as unincorporated partnerships. This classification considers the founders and beneficiaries as owners of the foundation's assets.

?Conditions for Election

To qualify for election as an unincorporated partnership, a Family Foundation must meet the following conditions:

1. The foundation must be established in the UAE.
2. It should not engage in any business activities other than managing family assets and succession planning.
3. The election must be submitted in the prescribed form and manner to the relevant authority.
4. The foundation must continue to meet the eligibility conditions and provide relevant information and records upon request from the authority.

Tax Planning Benefits

Family Foundations in the UAE provide several tax planning benefits, making them an attractive option for managing family wealth. Key advantages include:

1. Tax Deferral: Income and gains within the Family Foundation can be deferred, allowing for strategic distribution to beneficiaries when it is most tax-efficient.
2. Asset Protection: Assets held within a Family Foundation are protected from personal liabilities, ensuring long-term preservation of wealth.
3. Succession Planning: Facilitates smooth transition of wealth across generations, minimizing disputes and ensuring the family's financial legacy.
4. Reduced Administrative Burden: Consolidation of family assets under a single entity simplifies management and reduces administrative complexities.
5. Potential Corporate Tax Savings: A family foundation being treated as a 'pass-through' entity can shield the foundation's income from corporate tax, as natural persons are typically exempt from such taxes unless they engage in business activities.

Challenges and Considerations

However, it's essential to recognize that family foundations are not a one-size-fits-all tax planning solution. The Federal Tax Authority (FTA) requires these foundations to demonstrate that their primary purpose is not to avoid corporate tax to qualify for 'pass-through' status.

Activities and Restrictions

To qualify for 'pass-through' status, a family foundation must refrain from engaging in activities that would be deemed as business if undertaken by individuals. Therefore, any plans to utilize a family foundation for tax-saving purposes should undergo a thorough review by business owners.

Transparency and Compliance

The importance of maintaining transparency and compliance with the regulatory requirements is emphasized. The Family Foundation must not conduct any business activities and should solely focus on managing assets and wealth for the beneficiaries

Tax Implications for Beneficiaries

Individual beneficiaries of family foundations may face tax implications if they engage in business activities. They may need to register for corporate tax if applicable. Additionally, the tax implications for non-resident beneficiaries depend on the nature of income and the prevailing tax code.

Establishing a Foundation

In 2017, UAE introduced the foundation setup in ADGM, allowing the creation of special structures for legacy planning for family businesses, real estate property, stocks, personal bank accounts, and other assets such as art and intellectual property. The foundation setup is the new way to manage and restructure personal wealth in UAE.

Foundation Structure and Management

A foundation is a legal entity that does not have any shareholder or member; it is self-owned by the founder. The foundation is managed by a council member (similar to a board of directors) who follows the founder's charter and by-laws. Beneficiaries are added who receive the benefits and assets of the founder as per the founder's rules and regulations. A guardian can also be appointed to oversee the council member's work.

Benefits of a Foundation

Let's understand the general benefits of a foundation:

1. Succession Planning: The foundation takes care of the wishes of the founder, and the assets are distributed to the beneficiaries as per the terms and laws set by the founder. Beneficiaries enjoy the benefits and are added by the founder during the incorporation period.
2. Asset Protection: The most important benefit you get with the foundation is asset protection. If the founder gets into financial difficulties, the founder's asset is not accessible to creditors, banks, the government, or other family members because the foundation separates the individual from the ownership of the asset.
3. Philanthropy: As per the wish of the founder, a foundation can be used for charitable purposes and to give back to society.
4. Legacy: A foundation creates a legacy plan that makes the family assets distributed from one generation to another.

Foundation Regimes in UAE

In the UAE, foundations can be established under three regimes:

1. The Abu Dhabi Global Market (ADGM)
2. The Dubai International Financial Centre (DIFC)
3. The RAK International Corporate Centre (RAK ICC)

These regimes provide a legal framework that ensures the security of assets, facilitates succession planning, and offers tax advantages within the UAE's favorable tax environment. Each regime has its own specific features and requirements, but they all share the common goal of providing a robust structure for managing family wealth and legacy.All the regimes are more similar to each other, but you will find some rules and regulations are different and also a small difference in price.

1. The Abu Dhabi Global Market (ADGM): Introduced in 2017, the ADGM Foundations Regulations allow for the creation of foundations designed for asset protection, succession planning, and managing family wealth. This regime is particularly notable for not requiring ongoing annual audits unless requested by the Registrar.
2. The Dubai International Financial Centre (DIFC): Established under the DIFC Foundations Law No. 3 of 2018, this regime offers flexibility in succession planning and wealth structuring. It is the only regime that allows for a company to be morphed into a foundation and provides for alternative dispute resolution through arbitration.
3. The Ras Al Khaimah International Corporate Centre (RAK ICC): The RAK ICC Foundations Regulations were adopted in 2019, making it the third jurisdiction within the UAE to offer a foundation regime. This regime is unique in its mandatory requirement for a registered agent and benefits from UAE's privacy laws, ensuring that foundation information is not publicly accessible.

Requirements

All regimes have almost the same requirements with some minor differences.

Setting up an ADGM foundation requires:

1. One or more founders, who may be individuals or legal entities.
2. At least two council members (one individual is mandatory).
3. A mandatory guardian if there is no surviving founder.
4. Beneficiaries, who may be individuals or legal entities.

Setting up a DIFC foundation requires:

1. One or more founders, who may be either individuals or legal entities.
2. At least two council members.
3. A mandatory guardian if the foundation has charitable or specified purposes.
4. Beneficiaries, who must be individuals.

Setting up a RAK ICC foundation requires:

1. One founder, who may be an individual or a legal entity.
2. At least two council members.
3. A mandatory guardian if the foundation has charitable or specified purposes.

Cost for Setting Up a Foundation

The license generally costs around USD 500 to USD 1,800 depending on which regime you choose. There are also additional costs charged by the agent such as registered office, audit report, setup fee, etc.

Conclusion

In conclusion, while family foundations offer a means to manage and preserve wealth, understanding their tax implications demands careful consideration, Strategic Planning, and analysis. It's imperative to grasp the intricacies of not only UAE corporate tax laws but also related trust laws and seek professional guidance to ensure compliance and maximize potential benefits.

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