The UAE Federal Tax Authority’s May 2025 Corporate Tax Guide on the Taxation of Family Foundations clarifies how UAE foundations, DIFC trusts, ADGM trusts, and similar succession structures are treated under the UAE corporate tax regime. The guide is especially important for family office structures using incorporated foundations or multi-tier holding arrangements to hold family wealth.
Corporate tax starting point for foundations
The UAE Corporate Tax Law imposes a 9% tax on the taxable income of taxable persons.
A UAE-incorporated foundation, including a DIFC Foundation or ADGM Foundation, is a juridical person with separate legal personality. Without an exception, this means it falls within the definition of a taxable person and would be subject to UAE Corporate Tax on worldwide income.
The key relief is the Family Foundation Exception under Article 17 of the Corporate Tax Law.
If a foundation qualifies and obtains Federal Tax Authority approval, it is treated as fiscally transparent. In that case:
- the foundation itself pays no UAE Corporate Tax;
- income is attributed directly to the beneficiaries;
- the beneficiaries are treated as having earned the income themselves.
For individual beneficiaries who are not subject to UAE Corporate Tax on personal income, this can produce a favourable tax outcome.
Trusts and foundations are treated differently
The guide draws a major distinction between unincorporated and incorporated structures.
Unincorporated trusts include:
- DIFC trusts;
- ADGM trusts;
- foreign common law trusts.
These do not have separate legal personality and are treated as fiscally transparent by default under UAE Corporate Tax law. They do not need to apply for the Family Foundation Exception for that default treatment.
Incorporated structures include:
- DIFC Foundations;
- ADGM Foundations;
- incorporated trusts established under UAE Federal Decree-Law No. 31 of 2023.
These have separate legal personality and are taxable persons. They must actively apply for and obtain FTA approval to be treated as fiscally transparent under the Family Foundation Exception.
A foundation must first register for UAE Corporate Tax before applying through the FTA’s EmaraTax portal.
Requirements for the Family Foundation Exception
The guide identifies five core requirements.
First, beneficiaries must be natural persons or public benefit entities. The foundation must be set up for identifiable individuals, family members, and/or qualifying charitable or public benefit organisations. A foundation whose beneficiaries are entirely corporate entities will not qualify.
Second, the foundation’s principal activity must be asset holding or investment management. Its main purpose must be managing savings or investments for the family.
Third, the foundation must not conduct active business activity. It should not run a trading business or carry on activities that would be treated as a business if conducted directly by the founder or beneficiaries.
Passive income, dividends, rental income, and interest are treated differently from active trading operations.
Fourth, the foundation must not have a tax avoidance purpose. The primary reason for establishing it must not be to avoid UAE Corporate Tax.
Fifth, the foundation must comply with any ministerial conditions prescribed by the FTA.
The guide also clarifies that the foundation does not need to be a UAE entity. A foreign foundation established in a jurisdiction such as the Cayman Islands, Liechtenstein, or Jersey may apply for the Family Foundation Exception if it otherwise meets the conditions and is treated as a taxable person in the UAE.
Multi-tier family office structures
Many family office structures involve several layers, such as a foundation at the top, holding companies beneath it, and operating businesses or investment vehicles below those.
The guide clarifies that where a Family Foundation wholly owns and controls a subsidiary entity, and the subsidiary independently meets the Family Foundation Exception conditions, the subsidiary may also apply for fiscally transparent treatment.
This can allow income to flow through the subsidiary, to the foundation, and ultimately to the family beneficiaries without corporate tax applying at intermediate levels.
The guide includes an example of an ADGM Foundation holding two UAE LLCs that hold real estate. If the foundation and each LLC individually meet the exception requirements and each obtains FTA approval, the income, assets, and liabilities of the whole structure are treated as belonging directly to the beneficiaries.
The same analysis can apply where the top-level vehicle is a DIFC trust rather than a foundation. The DIFC trust may be automatically transparent, but subsidiaries below it still need to meet the Family Foundation Exception requirements to receive the same treatment.
Annual confirmation requirement
FTA approval is not a one-time compliance step.
Once a foundation has been approved for fiscally transparent treatment, it must file an annual confirmation to maintain that status.
This creates an ongoing compliance obligation for any family structure relying on the Family Foundation Exception.
What existing structures should review
Existing incorporated foundations in DIFC, ADGM, or foreign jurisdictions should assess whether they qualify for the Family Foundation Exception.
If they qualify, the practical steps are:
- register for UAE Corporate Tax;
- apply for the Family Foundation Exception through EmaraTax;
- maintain annual confirmation filings after approval.
A foundation that qualifies but has not applied is not yet receiving the fiscally transparent treatment available under the law.
Existing unincorporated trusts benefit from automatic fiscal transparency, but any subsidiary entities underneath them need separate analysis.
For multi-tier structures, each entity in the chain should be reviewed individually. A top-level foundation or trust may qualify, while a subsidiary may fail to meet the conditions, creating corporate tax exposure at that intermediate level.
Planning implications
The guide confirms that UAE foundations and trusts can be useful succession and wealth planning vehicles, but the structure must be designed correctly.
For new structures, the main planning goal is to ensure the vehicle qualifies for fiscal transparency from the start rather than requiring corrective work later.
For existing structures, the main risk is assuming that a foundation is automatically tax transparent when it is actually an incorporated taxable person that must apply for the Family Foundation Exception.
The guide makes clear that families seeking fiscally transparent treatment must take active compliance steps: registration, application, and annual confirmation. Without those steps, a family foundation may face an unexpected UAE Corporate Tax position.
Source article: knightsbridge.ae
