UAE Foundations: Tax, Compliance, And Structuring Considerations

From a Tax Planning Perspective

From a tax planning perspective, however, UAE foundations require careful planning, ongoing compliance, and a clear understanding of how tax rules apply across jurisdictions. This article provides a detailed overview of UAE foundations, with a particular focus on tax treatment, filing obligations, international structuring, and risk considerations, supported by practical examples and FAQs.

What Is a UAE Foundation?

A UAE foundation is a separate legal entity established to hold and manage assets for a defined purpose or for the benefit of designated beneficiaries. Unlike companies, foundations have no shareholders, and unlike trusts, they possess independent legal personality.

UAE foundations are most commonly established in:

• Abu Dhabi Global Market (ADGM)
• Dubai International Financial Centre (DIFC)

Both jurisdictions operate under internationally recognised legal frameworks, drawing on common law principles and global best practices.

Once assets are transferred to a foundation, they are legally owned by the foundation itself, not by the founder. This legal separation is central to asset protection, succession planning, and governance continuity.

Key Parties to a UAE Foundation

A typical foundation structure involves:

Founder

The individual or entity establishing the foundation and contributing assets. The founder defines the purpose, governance rules, and beneficiary framework.

Foundation Council

The governing body responsible for managing the foundation and its assets in line with the charter and regulations.

Beneficiaries

Individuals or entities entitled to benefit from the foundation, either immediately or in the future.

Guardian (Optional but Common)

An oversight role ensuring the foundation council adheres to the founder's intent. Frequently used in family wealth and succession structures.

Common Uses of UAE Foundations

UAE foundations are widely used for:

• Family wealth structuring
• Succession and estate planning
• Holding international real estate
• Owning shares in operating companies
• Investment portfolios
• Family office structures
• Philanthropic objectives

They are particularly effective for international families and entrepreneurs with cross-border assets.

Tax Treatment of UAE Foundations – Core Principles. Are UAE Foundations Subject to UAE Corporate Tax?

In principle, a UAE foundation is considered a juridical person and can fall within the scope of UAE Corporate Tax (CT). However, most foundations are designed as passive holding vehicles, not operating businesses.

Where a foundation:

• Does not carry out commercial activity, and
• Exists solely to hold assets or investments,

It is generally treated as tax-neutral at the UAE level.

Tax neutrality is based on substance and activity, not on automatic exemption.

Foreign Activities and Assets Held by Foundations

Passive Foreign Asset Holding (Most Common Scenario)

If a UAE foundation holds:

• Foreign real estate
• Shares in foreign companies
• Investment portfolios
• Dividend-producing assets

And does not actively trade or provide services, no UAE corporate tax is typically levied at the foundation level.

Example: A DIFC foundation holds shares in a French operating company.

• French corporate tax applies at the subsidiary level
• No UAE tax is applied to the foundation
• Potential taxation arises at the beneficiary level, depending on residence

Foreign Operating Companies and Permanent Establishments

If a foundation owns a foreign operating company or a foreign branch constituting a permanent establishment (PE), taxation occurs in the jurisdiction where the activity takes place.

Example:
An ADGM foundation owns a German GmbH.

• The GmbH pays German corporate tax
• The foundation is not subject to UAE corporate tax on those profits

When UAE Corporate Tax May Apply to Foundations

UAE corporate tax (currently 9%) may apply if a foundation:

• Actively trades
• Provides services
• Operates a business
• Employs staff and invoices clients

Taxable Example:
A foundation runs a consulting business from Dubai serving foreign clients → UAE corporate tax applies.

Non-Taxable Example:
A foundation holds shares and investments only → no UAE corporate tax.

From a tax perspective, activity classification is critical.

Beneficiary-Level Taxation: The Primary Tax Exposure

While foundations are often tax-neutral, taxation frequently arises at the beneficiary level, based on tax residency.

UK Beneficiaries

• Distributions may be taxed under UK trust/foundation rules
• Anti-avoidance and "settlor-interested" provisions may apply

EU Beneficiaries

• Tax treatment varies by country
• May include income tax, wealth tax, or look-through rules

UAE & GCC Beneficiaries

• UAE residents generally face no personal income tax
• GCC treatment varies but is often tax-efficient

Key audit consideration: beneficiary profiling is essential.

Foundations vs Trusts vs Companies - Corporate Set Up

Foundations combine trust-style protection with corporate-style governance, making them attractive for international structures.

Filing, Reporting, and Compliance Obligations

Even where no tax is payable, UAE foundations must comply with ongoing obligations:

• Maintain accounting records
• Retain supporting documentation
• Comply with AML/KYC regulations
• File updates with the relevant registrar (ADGM or DIFC)
• Assess UAE corporate tax registration requirements
• Prepare audited financial statements where required

Audit requirements depend on:

• Jurisdiction
• Asset size
• Nature of activities

Important: tax neutrality does not remove compliance obligations.

Illustrative Structure Example

Founder

│

▼

UAE Foundation (ADGM / DIFC)

│

├── Holding Company (EU / Offshore)

│ │

│ └── Operating Companies (Germany, Italy, UAE)

│

└── Investment Portfolio / Real Estate

Beneficiaries (UAE / UK / EU)

Tax outcome:

• Operating companies taxed locally
• Foundation tax-neutral
• Beneficiaries taxed according to residence

FAQs – UAE Foundations

Do UAE foundations pay tax in the UAE?
Generally no, if passive and non-commercial.

Is foreign income taxed in the UAE?
Usually no; it is taxed where the activity or asset is located.

Do foundations need to register for UAE corporate tax?
Often yes, even if tax payable is nil.

Are UAE foundations better than trusts?
For many international and civil-law families, yes.

Can founders retain control?
Yes, through governance rules, reserved powers, and guardianship.

Are audits mandatory?
Case-specific; depends on jurisdiction, assets, and activities.

Conclusion: Foundations a workable and reliable Tax Solution

UAE foundations are among the most powerful and flexible wealth-structuring tools available today. When structured correctly, they offer tax neutrality, asset protection, and succession clarity within a respected regulatory framework. However, their effectiveness depends on proper governance, accurate classification of activities, ongoing compliance, and international tax coordination.

From an audit and assurance standpoint, UAE foundations must be treated with the same discipline as any sophisticated international structure. Careful planning, transparent reporting, and professional oversight are essential to preserving their intended benefits and ensuring long-term compliance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.