The UAE’s Federal Tax Authority (FTA) recently released a new Public Clarification on the “Corporate Tax treatment of family wealth management structures” (CTP008) (the Clarification). The Clarification reaffirms existing principles and provides helpful clarity from the FTA on selected corporate tax (CT) implications for family wealth structures in the UAE.
In this newsflash we briefly address these tax considerations with reference to the different participants that are typically found in a family wealth management structure, including:
- The family wealth holding vehicle (for example a foundation or trust);
- Legal entities held by the family holding vehicle through a multi-tier structure;
- Family offices (whether single or multi); and
- The family members.
Family Wealth Holding Vehicle
In determining the tax treatment applicable to the family wealth holding vehicle, one has to determine whether or not the vehicle has a separate legal personality.
Separate legal personality
A foundation established under the DIFC or ADGM foundation laws or a mainland trust will by default have a separate legal personality and will constitute a taxable person, unless an application is made under Article 17 of Federal Decree Law 47 of 2022 (the CT Law) for such vehicle to be treated as a tax transparent Family Foundation (Family Foundation). Where the vehicle qualifies under Article 17, it will not be subject to CT and any taxes will be assessed at the level of the beneficiary with income and expenditure allocated in proportion to the beneficiary’s distributive share.
Where the vehicle does not qualify under Article 17, it will be considered a taxable person in its own right and will be subject to CT on its taxable income (subject to such other relief as might be available under the CT Law, e.g. the dividend exemption, participation exemption or free zone relief).
No legal personality
Where the entity does not have a separate legal personality (for example a trust established under the DIFC or ADGM trust laws), it will by default be treated as tax transparent without first having to apply for Family Foundation status under Article 17. However, compliance with Article 17 remains important in a multi-tier structure where juridical persons held by the Family Foundation may seek to be treated as tax transparent, in which case an application will still be required to afford these entities tax transparency.
Multi-tier structures
Ministerial Decision 261 of 2024 previously extended the application of Article 17 of the CT Law to any juridical person that (i) is wholly owned and controlled by a tax transparent Family Foundation, either directly or indirectly through an uninterrupted chain of tax transparent entities; and (ii) meets the requirements under Article 17(1) of the CT Law.
Where a company wholly owned by the Family Foundation meets the requirements described above, it can apply for tax transparency, in which case the company will not be subject to CT and any taxes will be assessed at the level of the Family Foundation’s beneficiaries.
Importantly, to qualify for transparency neither the company nor the Family Foundation will be allowed to carry on any activities that would have constituted Business or Business Activities if carried out by the natural person beneficiaries directly and their activities should therefore be limited to only those that generate Personal Investment income and Real Estate Investment income (refer to Cabinet Decision 49 0f 2023 for further guidance on the meaning of these concepts). Failing this, the relevant entity will be considered a taxable person in its own right and will be subject to CT on its taxable income (subject to such other relief as might be available under the CT Law, e.g. dividend exemption, participation exemption, free zone relief). In addition any entities below the non-compliant entity will also revert to being taxable persons as there will no longer be an uninterrupted chain of tax transparent entities.
For further details on the administrative requirements applicable to Family Foundations and their subsidiaries in a multi-tier structure, please refer to the FTA’s CT Guide on the ‘Taxation of Family Foundations’ (the Foundations Guide).
Family members
The family members as natural person beneficiaries of the Family Foundation will not be subject to Corporate Tax on their distributive share of income from the Family Foundation on the basis that such income would either be considered Personal Investment income or Real Estate Investment income. This would also apply to any income generated through a multi-tier structure where all the entities qualify for tax transparency under Article 17.
Income derived from a tax transparent wealth management vehicle that does not meet the conditions of Article 17(1) of the Corporate Tax Law will need to be assessed with reference to the nature of the income distributed. Where the income qualifies as Personal Investment income or Real Estate Investment income, this would not be taxable in the hands of the family members. Should the income be derived from other Business or Business Activities and the beneficiary’s share of that income exceeds AED 1 million in a Gregorian calendar year, this will be subject to CT.
The Clarification also states that Income derived from a wealth management vehicle that constitutes a taxable person in its own right and does not meet the requirements of Article 17 should not be subject to CT in the beneficiaries’ hands as this would constitute Personal Investment Income.
Family offices
Where a family office is used to manage the family's wealth, for example by overseeing asset management, coordinating with trustees or foundation boards and ensuring regulatory compliance, the family office will be subject to CT on any fees it derives from the provision of these services.
Where the family office is established in a free zone, it may qualify for free zone relief under limited circumstances (for example, where it derives income from wealth and investment management services that are subject to the regulatory oversight by a Competent Authority in the UAE). In this regard the Clarification provides practical examples illustrating the differences when using an unregulated single family office versus a regulated multi family office.
The Clarification confirms that a Family Foundation (or the family members) can hold shares in a family office directly without tainting the Family Foundation’s tax transparency or that of other entities wholly owned by the Family Foundation through a multi-tier structure. However, where the family office itself serves as a holding vehicle in the multi-tier structure, and the family office constitutes a taxable person, any entities held below the family office will not qualify for tax transparency as they will not be held through an uninterrupted chain of tax transparent entities.
Conclusion
In summary the Clarification serves as a helpful guidance document when evaluating the tax implications of family wealth holding structures in the UAE, and families should take careful note of these considerations when structuring their affairs.
Our Tax Services
Our Tax Team can assist you in better understanding the tax considerations raised in the Clarification and provide you with tailored support when structuring your family wealth in the UAE.
Hadef & Partners provide clients with specialist tax advice, planning and implementation support to achieve optimal tax outcomes for their business and personal interests in the UAE. Should you require support, please contact Theunis Claassen, our Head of Tax, to arrange an initial discussion.