The UAE Ministry of Finance has just unveiled crucial updates with Ministerial Decision No. (261) of 2024, transforming the tax landscape for family foundations, unincorporated partnerships, and foreign partnerships. These changes, effective from June 1, 2023, are designed to provide greater tax flexibility, simplify compliance, and better align with global standards. If your business operates in any of these sectors, these updates are set to streamline your tax processes and enhance financial benefits—here’s what you need to know!
New Breakthroughs for Family Foundations: What are the Latest Updates?
1. Treatment of Family Foundations as Unincorporated Partnerships
One of the most important updates for family foundations is the ability to have their income treated as if it were directly earned by the founder or the foundation’s council members. Previously, only the rental and investment income generated by the foundation could be treated as exempt income, akin to how individuals manage their wealth. However, the new regulation extends this tax treatment to juridical persons wholly owned by family foundations, such as Single Family Offices (SFOs).
This means that family foundations and their wholly owned entities can now benefit from the same tax exemptions available to individuals. Income generated by such juridical entities (for example, rental income or investment returns) will be deemed to be earned directly by the foundation’s founders or council members, ensuring that the tax benefits remain in place. This change simplifies the wealth management process, aligning the treatment of family foundations with that of individuals and making it easier to manage assets under the foundation.
2. Family Foundation Entities Can Apply for Tax Transparent Status
The decision now allows juridical persons within a family foundation to apply for tax transparent status under the UAE Corporate Tax framework. This is particularly important as it allows family foundations to benefit from additional tax advantages, similar to other transparent entities, while maintaining flexibility in how they manage assets.
In practical terms, this means that family foundations holding significant assets in the UAE can now gain clearer and more predictable tax treatment, without needing to go through complicated verification processes for each individual asset holder or member. For families with large estates or complex business interests, this change offers significant benefits in terms of tax planning and structuring.
3. Aligning with UAE Corporate Tax Framework
The updated regulation further strengthens the role of family foundations within the UAE’s Corporate Tax framework by enabling family foundations to receive the same treatment as unincorporated partnerships. This alignment is vital for those seeking tax advantages while maintaining family wealth. Foundations with beneficiaries, especially those involving public benefit entities, can now ensure that their wealth management strategies align with broader UAE tax policy, while still preserving the tax benefits that have traditionally been available to such entities.
Additionally, family foundations can now more easily navigate the legal and tax structures that govern their operations. The tax transparency provision for foundations ensures that their income is not subject to the complex taxation processes that might apply to other business entities, making it easier for them to operate across multiple jurisdictions.
4. Impact on Succession Planning and Wealth Management
Family foundations are an essential part of succession planning in many wealth management strategies. With the new amendments, family foundations can now focus more on long-term wealth preservation without being encumbered by complex tax filings or compliance obligations. This facilitates smoother generational transitions and can ensure that family wealth is preserved and distributed according to the foundation’s goals and values.
The option for family foundations to apply for tax transparent status further enhances their ability to be a central vehicle for estate planning and asset protection, ensuring that wealth is managed efficiently while benefiting from favorable tax treatment.
Key Updates for Unincorporated Partnerships and Foreign Partnerships
Alongside the family foundation changes, unincorporated partnerships and foreign partnerships in the UAE also benefit from the revisions to Ministerial Decision No. 261 of 2024. These updates simplify tax reporting and compliance requirements, making it easier for both domestic and international partnerships to operate within the UAE’s tax framework.
1. Unincorporated Partnerships: Simplified Compliance
Under the previous regulations, unincorporated partnerships were required to notify the Federal Tax Authority (FTA) within 20 business days of any changes in the partnership structure—such as the addition of new partners or the departure of existing ones. This requirement has been removed. Instead, unincorporated partnerships are now required to report any changes to their partnership structure during the annual tax return filing process. This streamlined approach reduces administrative burdens and simplifies the compliance process for businesses operating as unincorporated partnerships.
2. Tax Treatment of Foreign Partnerships
Foreign partnerships, which are partnerships based outside the UAE, now benefit from the UAE’s corporate tax system under specific conditions. If a foreign partnership is recognized as tax transparent in its home jurisdiction, it can apply for tax transparent status in the UAE. This eliminates the need for individual partners to verify their tax status separately with the FTA. Instead, they can operate under the assumption that the partnership itself is tax transparent, provided they submit an annual declaration confirming their compliance.
This change provides greater ease of doing business in the UAE for international partnerships, aligning the UAE tax framework with global standards, and reducing the administrative burden on foreign businesses. By simplifying the tax verification process, the UAE becomes a more attractive destination for foreign partnerships, making it easier to navigate the regulatory landscape.
3. Extension of Tax Transparent Status to Juridical Persons in Foreign Partnerships
In a significant development, juridical persons (legal entities) that are part of foreign partnerships can now also apply for tax transparent status. This applies to foreign partnerships that own assets or generate income through their UAE operations, such as foreign entities with investments or rental properties. The ability to classify juridical persons as tax transparent simplifies tax reporting for foreign businesses and provides them with the same benefits enjoyed by unincorporated partnerships.
For international businesses operating in the UAE, this update reduces the complexity of tax filings and ensures that they can benefit from a more straightforward tax structure, fostering greater international business activity in the region.
Why These Changes Matter for Family Foundations, Unincorporated, and Foreign Partnerships
- These updates provide greater flexibility and simplified compliance for entities under the UAE’s Corporate Tax framework. Family foundations, unincorporated partnerships, and foreign partnerships can now operate more efficiently while benefiting from the UAE’s tax advantages.
- For family foundations, the option to be treated as unincorporated partnerships and apply for tax transparency boosts wealth management and succession planning.
Unincorporated partnerships benefit from the removal of the FTA notification requirement, streamlining tax reporting and reducing administrative burdens. Foreign partnerships gain easier operations in the UAE through tax transparency, aligning with global standards.
For families managing wealth and succession planning in the UAE, the latest tax reforms bring much-needed clarity and relief. MOF Decision simplifies compliance and enhances tax transparency for family foundations, ensuring your legacy remains intact. Whether you are setting up a foundation in the DIFC, ADGM, or RAK ICC, this is indeed a game changer.
With easier reporting for partnerships and clear guidelines for tax-transparent structures, family foundations now have the tools to steer the UAE’s tax landscape with confidence.
At MS, we specialize in guiding family offices and foundations through this evolution, providing tailored support to align with your long-term goals. Let us help secure your family’s future while embracing the opportunities this new framework offers.