Welcome to the 7th part of our series on comprehensive corporate tax insights! Understanding every aspect of Corporate Tax is crucial for individuals, families, and businesses alike. From the establishment of Family Foundations to the operations of Investment Funds and considerations for Foreign Entities, each aspect plays a pivotal role in wealth management and tax planning. In this comprehensive guide, we delve into the various facets of UAE Corporate Tax, covering Family Foundations, Investment Funds, and the tax implications for Foreign Entities.
If you’re just joining us, we recommend starting from the beginning of our series to get a full grasp of the insights we’ve shared so far. You can find the first blog post here.
A Closer Look at Family Foundations
Family Foundations stand as pillars of asset protection and wealth management for individuals and families in the UAE. These entities, whether in the form of foundations, trusts, or similar structures, safeguard assets for the benefit of designated beneficiaries or charitable causes as defined in the UAE Corporate Tax Law.
Understanding a Family Foundation
The core activities of a Family Foundation revolve around receiving, managing, investing, and disbursing funds and assets. Notably, if the founder, beneficiary, or other natural persons directly undertake these activities, they often do not fall within the scope of “Business” or “Business Activity” for UAE Corporate Tax purposes.
Tax Considerations for Family Foundations
While Family Foundations possess independent juridical status, they can choose to be treated as “Unincorporated Partnerships” for tax purposes. This designation allows the founder and beneficiaries to retain ownership of the foundation’s assets and potentially exempts the foundation’s income from UAE Corporate Tax.
Family Foundations and UAE Corporate Tax
Family Foundations, including certain trusts, are independent juridical persons with separate legal personality, potentially subjecting them to UAE Corporate Tax. However, these entities can choose to apply for treatment as transparent “Unincorporated Partnerships” for UAE Corporate Tax purposes, which allows the founder/settlor and beneficiaries to be viewed as owners of the foundation’s assets. This treatment generally exempts the income of the foundation from UAE Corporate Tax.
Applying for Unincorporated Partnership Status
A Family Foundation seeking treatment as an Unincorporated Partnership must meet specific conditions outlined in Article (17) of the Corporate Tax Law and Ministerial Decision No. 127 of 2023. The foundation must then submit an application to the Federal Tax Authority for consideration.
Tax Treatment of Beneficiaries
- Natural persons who are beneficiaries of a Family Foundation treated as an Unincorporated Partnership are individually subject to UAE Corporate Tax based on their involvement in Business Activities.
- Public benefit entities that are not listed as Qualifying Public Benefit Entities are considered Taxable Persons under the provisions of the Corporate Tax Law, even if they are beneficiaries of a Family Foundation.
Tax Treatment of Income for Beneficiaries
Once designated as an Unincorporated Partnership, the income distributed by the Family Foundation to beneficiaries outside the UAE may be subject to UAE Corporate Tax if the beneficiaries are Non-Resident Persons. This is in accordance with Article (12) of the Corporate Tax Law and Cabinet Decision No. 49 of 2023.
Exploring Investment Funds and Managers
In the realm of Investment Funds, the UAE offers various structures to facilitate investment and wealth growth, each with its own tax implications.
Qualifying Investment Funds
These funds, structured to pool investor funds for profitable ventures, can benefit from tax neutrality through partnership structures. Options for exemption from UAE Corporate Tax exist for qualifying corporate entities, including Real Estate Investment Trusts (REITs).
Investment Funds and UAE Corporate Tax
Investment funds that are structured as partnerships, unit trusts, and other unincorporated vehicles are generally treated as fiscally transparent “Unincorporated Partnerships” for UAE Corporate Tax purposes.
Exemption for Investment Funds
Investment funds that are structured as corporate entities, including REITs, or partnership funds that apply to be treated as a “Taxable Person” for UAE Corporate Tax purposes in their own right, can apply to the Federal Tax Authority to be exempt from UAE Corporate Tax as Qualifying Investment Funds, subject to meeting certain requirements.
Investment Managers in the UAE
UAE-based Investment Managers play a pivotal role in providing services to foreign funds. They benefit from the “Investment Manager Exemption,” avoiding UAE tax presence for foreign investors.
Creating a UAE Taxable Presence
Under the “Investment Manager Exemption” regulated UAE Investment Managers can provide discretionary investment or asset management services to foreign funds and customers without creating a Permanent Establishment for the foreign investors or the foreign investment fund in the UAE, where certain conditions are met.
Residency Considerations
A UAE-based Investment Manager, meeting exemption conditions, avoids creating UAE residency for foreign funds.
Tax Exemption for Investment Holding Companies
UAE investment holding companies and special purpose vehicles can seek UAE Corporate Tax exemption.
Eligibility for Exemption
Generally, investment funds must meet ownership conditions to be eligible for the Corporate Tax exemption. However, funds established for less than two Financial Years are not obliged to meet these conditions if there is sufficient evidence to demonstrate the intention of the investors to meet the ownership requirements after the first two Financial Years.
Sufficient Evidence for Exemption
The Federal Tax Authority will determine what constitutes sufficient evidence to demonstrate the intention of investors to meet ownership conditions. This may include correspondence emails with potential investors, internal communications showcasing existing investor strategies, and more.
Institutional Investors and REITs
Institutional investors are juridical persons and can invest in REITs that are Qualified Investment Funds. Natural persons can invest in a REIT if 20%+ shares are on a Recognised Stock Exchange.
Unincorporated Partnerships as Qualified Investment Funds
An Unincorporated Partnership that has applied to the Authority to be treated as a Taxable Person can also apply to be treated as a Qualified Investment Fund, provided it meets the relevant conditions under the Corporate Tax Law and corresponding Cabinet Decision.
Branches of Businesses
For businesses with operations or branches in the UAE, Corporate Tax considerations are vital for compliance and tax planning.
UAE Branches
- UAE branches of domestic or foreign entities are not separate juridical persons but extensions of their parent entities.
- Income earned by UAE branches of UAE businesses is subject to UAE Corporate Tax, consolidated under the parent entity.
- UAE branches of foreign businesses may be subject to UAE Corporate Tax if they constitute a Permanent Establishment.
Tax Liability for Foreign Branches
The income of foreign branches or Foreign Permanent Establishments of a UAE business will be included in the Taxable Income and UAE Corporate Tax Return of their UAE “head office,” unless the UAE “head office” elects to claim an exemption for its foreign branch profits. This exemption is available for foreign branch profits that have already been subject to tax in the foreign jurisdiction.
Creating a UAE Taxable Presence
A UAE branch of a foreign business incurs Corporate Tax upon establishing a Permanent Establishment.
Tax Considerations for UAE Branches
- For UAE branches of a UAE resident juridical person, no requirement to separately register or file for UAE Corporate Tax.
- UAE branch income is part of the Taxable Income for its “parent” or “head office”
Determining Permanent Establishment
A foreign juridical person will have a Permanent Establishment in the UAE if:
- It has a fixed or permanent place in the UAE for conducting business.
- There is a person who has and habitually exercises authority to conduct business in the UAE on behalf of the foreign entity.
Preparatory or Auxiliary Activities
Preparatory or auxiliary activities are those performed in support of more substantive Business Activities of the foreign entity. These may include storage, display, or delivery of goods, limited marketing activities, market research, or attendance at seminars.
Taxation of Foreign Companies and Juridical Persons
- A foreign entity will be subject to UAE Corporate Tax if effectively managed or controlled in the UAE, has a Permanent Establishment, earns income from a nexus in the UAE, or earns income sourced from the UAE.
- Merely earning UAE sourced income would not trigger Corporate Tax Payable or require the foreign entity to register and file for UAE Corporate Tax.
Residency Criteria for Foreign Companies
A foreign juridical person may be treated as a UAE resident for Corporate Tax purposes and subject to UAE Corporate Tax on its income sourced from both the UAE and abroad if it is effectively managed and controlled in the UAE.
Taxation of Foreign Natural Persons
- Foreign natural persons will be subject to UAE Corporate Tax as a “Resident Person” if engaged in a Business or Business Activity in the UAE.
- Cabinet Decision No. 49 of 2023 provides further information on what brings a natural person within the charge to Corporate Tax.
Determining Non-Resident Tax Status
A foreign natural person not engaged in a taxable Business or Business Activity in the UAE would generally not be subject to UAE Corporate Tax.
Income Sourced from the UAE
Income is considered sourced from the UAE if:
- Derived from a UAE resident.
- Attributed to a Permanent Establishment in the UAE.
- Derived from activities, assets, capital, rights, or services performed or benefited from in the UAE.
Taxation of UAE Real Estate Investments
- Foreign natural persons investing in UAE real estate in their personal capacity without a License are generally not subject to UAE Corporate Tax.
- Income earned from UAE real estate by foreign juridical persons may give rise to a taxable nexus in the UAE and be subject to Corporate Tax.
Withholding Tax
A Cabinet Decision may specify types of UAE sourced income subject to Withholding Tax. Currently, the UAE Withholding Tax rate stands at 0%.
Taxation of UAE Investment Income
- Generally, income from dividends, capital gains, interest, and royalties earned by foreign juridical persons or natural persons will not be subject to UAE Corporate Tax.
- However, such income may be subject to Corporate Tax if attributed to a Permanent Establishment in the UAE.
In conclusion, the UAE Corporate Tax landscape offers a diverse array of structures and considerations for individuals, families, and businesses. From the establishment of Family Foundations to the operation of Investment Funds and taxation of Foreign Entities, each aspect is critical for effective wealth management and tax planning.
Navigating the challenges of UAE Corporate Tax requires a thorough understanding of the laws, regulations, and exemptions applicable to each entity type. It is essential to seek professional advice and stay updated on the evolving tax landscape to make informed decisions.
As the UAE continues to refine its tax policies, individuals, families, and businesses can benefit from strategic tax planning to optimize financial growth and compliance. By leveraging the available exemptions, partnerships, and regulatory frameworks, entities can navigate the UAE Corporate Tax terrain with confidence.
To stay updated with Corporate Tax Law and related implementing decisions you can visit this link.
