Planning to establish a foundation in the United Arab Emirates? Here’s what you need to know from a legal perspective
What is a Foundation?
- Dubai International Financial Center (DIFC), under the governance of the DIFC Foundations Law No. 3 of 2018;
- Abu Dhabi Global Market (ADGM), under the Foundations Regulations 2017; and
- Ras Al Khaimah International Corporate Centre (RAKICC), following the RAK ICC Foundations Regulations 2019.
The above Regulations are largely similar with just a few differences, discussed later in this article.
In all cases, a Registered Agent (i.e. a qualified person licensed by ADGM, DIFC or RAK ICC) will need to be appointed to incorporate a Foundation.
In practice, Foundations are primarily used for the following purposes:
- wealth structuring and succession planning;
- asset protection, and
- long-term holding structure of income generating assets (such as businesses and real estate portfolios).
What legal documents should a Foundation have?
A Foundation should have By-laws in compliance with the Regulations. These will include all the matters not included in the Charter, such as:
- functions of the Council (defined below);
- procedures for the appointment, resignation, and removal of members of the Council and Guardian;
- the process for decision-making; and
- the circumstances in which the Foundation’s assets may be distributed, accumulated, or applied, etc.
In case of a conflict between the Charter and the By-laws, the Charter shall prevail.
Who are a Foundation’s officers?
Prior to the Foundation’s registration, the Founder must appoint a Registered Agent, who will be included in the Charter and in the Foundation’s registration. The Foundation’s address must be the same as the Registered Agent’s address.
The Guardian can be an individual or a legal entity, appointed to supervise the Council and take reasonable steps to ensure that the Council carries out its functions appropriately and in accordance with the Regulations, Charter, and By-Laws.
A Beneficiary is a natural person or legal person who may benefit from a Foundation and is identified in the Charter or By-laws by name.
A Founder can also be a Beneficiary.
What assets can a Foundation have?
A Foundation can have any properties as assets, which must be managed according to the Charter, By-laws, and the provisions of the Regulations.
The Foundation can hold the assets of the Founder in the name of the Foundation. This means the assets no longer belong to the Founder, and a higher level of protection is placed between the Founder and their assets against creditors, governments, or other family members.
What are the differences between the three jurisdictions?
DIFC and RAK ICC Foundations are permitted to have an exclusive charitable purpose, which is not allowed as per Article 2 of ADGM Foundations Regulations 2017.
According to Article 54 of DIFC Foundations Law No. 3 of 2018, a dispute arising between the parties of the Foundation may be submitted to arbitration. This is not allowed under the ADGM and RAK ICC Regulations.
Pursuant to ADGM and RAK ICC’s Regulations, the Foundation must have an initial capital of US$100 or its equivalent in any other currency, which is not required as per DIFC Regulations.
RAK ICC does not maintain a publicly accessible register of information related to Foundations while ADGM and DIFC do.
The ADGM Foundation regime is the only jurisdiction with no ongoing annual requirement to file or audit accounts unless requested by the relevant regulatory authority.
What are the TAX benefits for Family Foundations in the UAE?
In the UAE, the structures and arrangements used to manage personal wealth and investments, i.e. Family Foundations are generally treated as fiscally transparent for corporate tax purposes, except for certain types of trusts and foundations that have a separate legal personality and receive the same treatment as any other legal entity, with their income included within the scope of corporate tax.
However, where Family Foundations are merely used to hold and manage personal assets and wealth – on behalf of and for the benefit of the individuals who are among the beneficiaries – this will result in an inconsistent corporate tax treatment as compared to the natural persons who hold and manage their assets directly.
According to the Corporate Tax Guide / CTGGCT1 issued by the UAE Federal Tax Authority (FTA) in September 2023, Family Foundations, subject to certain conditions being met, can apply to the FTA to be treated as an unincorporated partnership.
Article 17 of the Federal Law No. 47 of 2022 on the Taxation of Corporations and Businesses (Tax Law) also states that a Family Foundation will be treated as tax transparent provided that some conditions set out in the Tax Law are met. In addition, beneficiaries in the Family Foundation may not be subject to the UAE corporate tax in respect of the investment income earned by the Family Foundation.
Once the above application is approved by FTA, the Family Foundation shall be treated as an unincorporated partnership effective from the commencement of the tax period in which the application is made, or from the commencement of a future tax period, or any other date determined by the authority.
This article has been written by the experts at OH LLP and PKF UAE
*It reflects the personal opinion of the law firm and does not constitute legal advice*
OH LLP has legal consultants in the UAE, offering a wide range of legal services to new and established companies within DIFC and ADGM. For further details, please contact us on: info@ohllp.com or +97124110619
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