USING UAE FOUNDATIONS AS PART OF A TAX STRATEGY

This article has been researched and written by the Business Development team at Creation Business Consultants. AI has not been used in generating this article.

INTRODUCTION TO UAE FOUNDATIONS

In recent times, it has become increasingly important for advisors to families and corporate entities with significant wealth to have a deep and modern understanding of international compliance, tax regulations, reporting, and efficient structuring tools. This knowledge ensures that the underlying assets held by the group are protected and that wealth is distributed efficiently and effectively.

A common and popular tool used in these situations is Foundations, specifically Foundations established within a favourable jurisdiction such as the UAE, which this article will discuss in detail.

Foundations are legal entities designed for wealth management, asset protection, succession planning, and charitable purposes. They combine features of both trusts and corporations, offering a unique structure well suited for high-net-worth individuals, families, and businesses.

A UAE Foundation is a self-owned legal entity (i.e., it has no shareholders or owners) established to hold and manage assets for the benefit of beneficiaries or a specific purpose. The Foundation is governed by a charter and managed by a council, often with oversight from a protector and the guidance of a founder.

KEY FEATURES

• Separate legal personality – can own assets, sue or be sued.
• No shareholders or members.
• Perpetual existence (unless otherwise stated).
• Confidentiality and privacy.
• Flexible governance – may appoint a council, protector, advisor.
• Purpose or beneficiary-driven.

UAE Foundations are increasingly popular among international investors and families seeking a tax-neutral, stable, and well-regulated jurisdiction to preserve and grow wealth over multiple generations.

Using UAE Foundations as part of a tax strategy can offer legitimate benefits, particularly for wealth structuring, asset protection, and succession planning. While Foundations are not primarily tax-avoidance vehicles, they can be structured in ways that optimize tax liabilities within the legal frameworks of the UAE and the founder’s home country.

JURISDICTIONS WITHIN THE UAE SUITABLE FOR ESTABLISHING A FOUNDATION INCLUDE THE FOLLOWING:

• DIFC: The Dubai International Financial Centre offers a wide range of structuring tools. The DIFC’s independent regulation, common law framework, supportive infrastructure, and tax-friendly regime make it an ideal base to take advantage of the region’s rapidly growing demand for financial and business services.
• ADGM: The Abu Dhabi Global Market, one of the free zones within the city of Abu Dhabi, is an international financial centre in the capital of the United Arab Emirates. As a financial free zone, ADGM is an independent jurisdiction with rules and regulations aligned with international best practices. Companies have access to a growing ecosystem of finance, services, and talent. It is home to many of the world’s leading professional advisory firms. ADGM’s three independent authorities the Registration Authority, the Financial Services Regulatory Authority, and the ADGM Courts provide a holistic environment that enables registered companies to conduct business and operate with confidence, while being recognized by major financial centres across the world.

HOW UAE FOUNDATIONS ARE CRUCIAL WITHIN TAX MINIMIZATION STRATEGIES

The United Arab Emirates is a popular jurisdiction for holding assets, as it does not implement personal income tax, capital gains tax, or inheritance tax. Therefore, any assets placed inside a UAE-based Foundation can grow freely from local taxes. However, for founders and beneficiaries who are non-UAE tax residents, tax implications will depend on their home country’s laws and regulations concerning taxation, such as Controlled Foreign Corporation (CFC) rules or foreign trust regulations.

ASSET OWNERSHIP SEPARATION

The main reason why Foundations are a particularly useful structuring tool, as opposed to standard LLCs or holding entities, is that when assets are placed inside them, the ownership of these assets is completely severed. The asset is gifted to the Foundation and therefore is no longer personally owned by any individual.

This means, legally speaking, that exposure to estate or inheritance tax is significantly reduced and can help avoid death or gift transfer taxes in certain jurisdictions.

A good example of this is a UK resident using a UAE Foundation to remove assets from their estate for UK inheritance tax planning, subject to UK anti-avoidance legislation.

SUCCESSION AND ESTATE PLANNING

A common oversight in estate planning, when assets are held in a jurisdiction governed by UAE law, is failing to stipulate exactly where assets should be transferred after death. As a result, under Sharia heirship law, these assets may automatically pass to the eldest son. Within Foundations, properly drafting a detailed charter that clearly specifies what happens to assets in the event of death can override these compulsory heirship laws, helping to avoid disputes and potential tax penalties.

INTERNATIONAL TAX PLANNING

Efficient advisors will have an excellent understanding of how UAE Foundations can be structured for international tax efficiency, especially when combined with the UAE’s extensive network of double tax treaties (DTTs).

While historically the UAE was a zero-tax jurisdiction, the introduction of Corporate Tax (CT) in 2023 changed this somewhat, meaning that in certain instances UAE Foundations are treated as separate legal persons. Consequently, any income generated within the entity may be subject to 9% CT on amounts exceeding AED 375,000, such as corporately owned real estate assets producing a rental yield. Not all Foundations automatically qualify as “unincorporated arrangements”; they must meet specific Federal Tax Authority (FTA) conditions.

In practice, however, a Foundation can apply to be treated as an “unincorporated arrangement,” i.e., transparent for UAE tax purposes, if it acts primarily as a wealth-holding structure for beneficiaries. If it holds passive investments and distributes to non-residents, no UAE withholding tax applies, as the UAE imposes none. Even if subject to CT, the 0% rate applies on most passive foreign-sourced income (dividends, capital gains, interest) due to participation exemptions and foreign tax credits.

Thus, a Foundation can be structured as either:

• Opaque (taxable entity) — potentially a UAE tax resident, eligible for DTT benefits; or
• Transparent (look-through vehicle) — income is attributed directly to beneficiaries.

HOW TO UTILISE A UAE FOUNDATION TO MAXIMISE THE USE OF DOUBLE TAX TREATIES

In order to obtain access to treaty benefits, the Foundation must apply for a UAE Tax Residency Certificate (TRC) from the Federal Tax Authority (FTA). This means the Foundation is considered liable for tax in the UAE. In practice, TRCs are usually granted to opaque Foundations with UAE substance and management.

Once a TRC is obtained, the Foundation can claim treaty benefits, such as reduced withholding taxes on dividends, interest, and royalties from treaty partner countries.

EXAMPLE STRUCTURES

A. HOLDING COMPANY FOR INTERNATIONAL INVESTMENTS

A common setup is:
Foreign Co. → UAE Foundation → Underlying Investments Abroad

Example:

• UAE Foundation owns 100% of a German GmbH or French SAS.
•  The Foundation obtains UAE tax residency.
• Germany/France has a DTT with the UAE, reducing withholding tax on dividends:
  • e.g., Germany–UAE treaty → 5% or 0% WHT on dividends (instead of 15%).
  • e.g., France–UAE treaty → 5% or 0% WHT, depending on ownership.
• The UAE does not tax incoming dividends.

This results in:
Low-tax or zero-tax repatriation of foreign profits into the UAE Foundation. Distributions to beneficiaries (individuals) can then be made tax-free in the UAE, with beneficiaries taxed only if their home country imposes tax on receipt.

B. IP OR ROYALTY STRUCTURES

Utilising the same model as the structure above, the UAE Foundation can be established to own a group’s intellectual property and license it to foreign affiliates.

This means that treaty protection can reduce foreign royalty withholding tax, often from 30% down to 0–10%.

Any royalties received by the Foundation are exempt from tax or subject to a 0% rate in the UAE.

Finally, beneficiaries can receive distributions from the Foundation without UAE tax. However, the individual’s domicile and personal income tax liabilities must still be considered.

C. INVESTMENT FUNDS OR FAMILY OFFICES

A UAE Foundation can act as a private investment holding entity, pooling global investments and using treaties to minimize source-country taxation.

It can also serve as the “anchor” entity for multi-jurisdictional estate planning, for example:
Cayman Fund → UAE Foundation (as general partner or beneficiary) → Treaty-covered jurisdictions

WHY IT WORKS: TREATY ELIGIBILITY

It is common for many countries to accept UAE entities (including Foundations and holding companies) as residents for treaty purposes if:

● They have substance in the UAE (bank account, local service providers, management presence).
● They are subject to tax in the UAE (even at a 0% nominal rate).
● They can demonstrate effective management and UAE incorporation.
● A common practice is for corporate service providers to act as nominee council members or directors of Foundations or holding companies to further establish substance within the region.

Substance requirements matter simply having a paper Foundation will not suffice. The UAE’s Economic Substance Regulations (ESR) also reinforce this, and justification is commonly requested by foreign jurisdictions.

EXAMPLES OF DTT TREATMENTS ON UAE FOUNDATIONS RECEIVING DIVIDENDS/ INTEREST/ ROYALTIES.

SUMMARY TABLE OF TAXABLE EVENTS – UAE FOUNDATIONS

PRIVACY AND PROTECTION

UAE Foundations offer a high degree of confidentiality. Often, the registration and details of the members of a Foundation, such as beneficiaries and council members, are not publicly accessible.

In this context, the privacy of the internal governance of the Foundation helps protect the UBO’s assets from creditors or litigants in some cases, reducing risks that could result in financial losses and related tax consequences.

IMPORTANT CONSIDERATIONS

• Substance requirements: Some countries may challenge tax benefits if the Foundation has no real economic activity or substance.
• Controlled Foreign Corporation (CFC) rules: Some jurisdictions such as the US or UK, tax their residents on income earned through foreign entities.
• Beneficial ownership disclosures: Many countries now require disclosure of foreign-held assets.
  

FREQUENTLY ASKED QUESTIONS

• Do UAE Foundations pay corporate Tax? – Yes
• Can a Foundation help me avoid tax on dividends? – Dependent on the investors domicile and in some cases, yes.
• How do DTT’s apply to UAE Foundations? – Once the Foundation is structured as an opaque entity (UAE Tax Resident w/ TRC from FTA), it becomes eligible for UAE and International DTT’s.

TAKEAWAY

If you’re exploring how to use UAE Foundations as part of a legitimate and efficient international tax or succession plan, our team can help you design the right structure. At Creation Business Consultants, we specialize in creating compliant, tax-efficient, and secure UAE-based frameworks that align with your long-term objectives and global footprint.

Reach out to our company structuring team at [email protected] to schedule a free consultation and discover how a well-structured UAE Foundation can protect, preserve, and grow your wealth across generations.