UAE Corporate Tax treatment of founder’s endowment to a UAE Foundation

This case study addresses the UAE Corporate Tax treatment of assets contributed by a founder to a UAE foundation where the founder and the beneficiary are one and the same person. The practical question is whether the receipt of the endowed assets may be treated as taxable income in the hands of the foundation, or whether it should be regarded as a capital movement recorded directly in the foundation fund (equity).

The difficulty arises because the Corporate Tax Law does not contain a special rule dealing with founder endowments, founder contributions or capital contributions to private foundations. In the absence of such a special tax rule, the analysis must begin with the general architecture of the Corporate Tax Law: taxable income is derived from accounting income, subject to specific adjustments prescribed by the Law. Therefore, the Corporate Tax treatment depends, in the first instance, on whether the receipt is recognized as income in the financial statements.

Facts

Corporate X Foundation is a UAE foundation established for private wealth holding and succession planning purposes.

The Foundation has separate legal personality under the relevant UAE foundation regime. It has no issued share capital, no shareholders and no membership interests. Its assets are administered by the foundation council in accordance with its charter and by-laws.

Mr X establishes the Foundation and transfers AED 10,000,000 in cash and an investment portfolio to it. The transfer is described in the constitutional and supporting documents as an endowment (founder contribution). There is no no contractual obligation on the Foundation to return the contributed assets to Mr X.

Mr X is also the sole beneficiary of the Foundation. Under the constitutional documents, he is entitled to receive distributions from the Foundation and, on termination of the Foundation, to receive the remaining net assets after settlement of liabilities and administrative expenses.

The transfer is made by Mr X in his personal capacity. It is assumed that Mr X does not conduct a Business or Business Activity in the UAE in relation to the contributed assets.

The Foundation prepares general purpose financial statements under IFRS.

Question

Should the endowment received by Corporate X Foundation be treated as taxable income for UAE Corporate Tax purposes?

Summary

Upon examination of the UAE Corporate Tax framework and the relevant IFRS principles, the better view is as follows.

1. On the present facts, the endowment should be recognized directly in the Foundation’s equity-like fund, and not as income in profit or loss. It should therefore not be included in the Taxable Income of Foundation X.
2. This position is already supportable where Foundation X is not treated as tax-transparent. The argument becomes even stronger where Foundation X is treated as tax-transparent.
3. The conclusion should be supported by the Foundation’s charter and by-laws, the endowment instrument, the beneficiary provisions, the termination provisions, the accounting policy under IAS 8, and the financial statement presentation adopted by the Foundation.

Analysis

We reach the above conclusions based on the following considerations.

No special rule for founder endowments in Corporate Tax framework

1. The Corporate Tax Law does not contain a specific rule dealing with founder contributions, endowments, settlements or capital contributions to a UAE foundation. There is no express provision stating that an endowment of assets to a foundation is taxable income of the foundation. Nor is there a specific adjustment that recharacterizes a capital contribution as taxable income merely because the receiving entity is a foundation rather than a company.
2. In the absence of such a special rule, the general mechanism of the Corporate Tax Law applies. Article 20(2) provides that Taxable Income for a Tax Period is the Accounting Income for that period, adjusted as prescribed by the Law. Accounting Income is defined in Article 1 by reference to the accounting net profit or loss in the financial statements prepared in accordance with Article 20. Clause 1 of Article 20 refers to “standalone financial statements prepared for financial reporting purposes in accordance with the accounting standards accepted in the State”.
3. Ministerial Decision No. 114 of 2023 then determines the accounting standards to be used for Corporate Tax purposes. The general rule is IFRS, subject to the possibility of using IFRS for SMEs where the relevant conditions are satisfied.
4. The effect is important. UAE Corporate Tax does not begin with a free-standing economic concept of “receipt”. It begins with accounting income, then applies statutory adjustments. Therefore, if the endowment is not recognized in profit or loss for accounting purposes, and if no specific Corporate Tax adjustment requires inclusion, the receipt should not create Taxable Income merely because assets have moved into the Foundation.
5. This point is central to the case study. The tax analysis depends on the accounting classification, not because accounting overrides tax, but because the Corporate Tax Law deliberately uses accounting income as the starting point.

Updated FTA Guide on transfers to Family Foundations

6. Yesterday, the FTA issued an updated Corporate Tax Guide on the Taxation of Family Foundations No. CTGFF1. It contains a specific section 7.8 on “Transfers to a Family Foundation”. This section is helpful, but it does not directly address the Corporate Tax treatment of the receipt of endowed assets in the hands of the Family Foundation. In other words, it does not answer whether the transferee Foundation should recognize taxable income merely because it receives assets from a founder, settlor or similar transferor.
7. Instead, the section is framed from the perspective of the transferor. It states that “a founder or settlor (or similar transferor) typically contributes assets or funds to a Family Foundation when it is formed and/or subsequently. Where the transferor is a Related Party to the Family Foundation, any transactions should meet the arm’s length standard. The gain or loss arising from such transactions may be subject to Corporate Tax depending on the specific facts and circumstances, including whether the transferor is a Taxable Person (or would be a Taxable Person as a result of the transaction)”. 
8. The Guide then clarifies: “However, where the transferor is a natural person, and the assets transferred are Personal Investments and/or Real Estate Investments (see Section 4.3), the transaction would not be subject to Corporate Tax”. This clarification obviously addresses the Corporate Tax position of the natural person transferor, not the taxability of the receipt in the hands of the Family Foundation. The reference to Personal Investments and Real Estate Investments is relevant only because those concepts apply to natural persons and determine whether the transferor is conducting a Business or Business Activity for Corporate Tax purposes. It does not provide a separate rule for the transferee Foundation, nor does it answer whether the Foundation recognizes Accounting Income or Taxable Income on receipt of the endowed assets.
9. Accordingly, the updated Guide should not be overread as providing an express rule on the taxability of the endowment in the hands of the Foundation. Its value is narrower but still important. It shows that the FTA recognises transfers of assets to a Family Foundation as a normal feature of the regime, and it confirms that, in the case of a natural person transferring Personal Investment or Real Estate Investment assets, the transaction is not subject to Corporate Tax at the transferor level. This does not replace the separate analysis of whether the Foundation itself has accounting income and Taxable Income on receipt of the endowed assets

Accounting framework

10. IFRS does not contain a specific standard dealing directly with founder endowments to UAE private foundations. Accordingly, IAS 8.10–11 is relevant. In the absence of a specific IFRS Standard that applies to the transaction, management must use judgement in developing and applying an accounting policy that results in relevant and faithfully representative information, having regard first to IFRS requirements dealing with similar and related issues and, secondly, to the definitions, recognition criteria and measurement concepts in the IFRS Conceptual Framework (CF).
11. Under the CF 4.63, equity is the residual interest in the assets of the reporting entity after deducting all its liabilities. This definition is not confined to companies with share capital. CF 4.67 expressly states that the definition of equity applies to all reporting entities, including entities such as sole proprietorships, partnerships, trusts and other forms whose legal and regulatory frameworks may differ from ordinary corporate entities.
12. Therefore, the absence of share capital, shares or shareholders in a foundation is not decisive. A foundation can have equity for IFRS purposes. The relevant residual category may be described as foundation fund, endowment fund, beneficiary capital, accumulated fund or net assets attributable to beneficiaries. The label is less important than the substance.
13. CF 4.68 defines income as increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from holders of equity claims. This means that not every increase in net assets is income. If the increase arises from a contribution by a holder of an equity claim, it is not income and should be recorded directly in equity.
14. The accounting question is therefore whether the founder-beneficiary contributes the assets as a holder of an equity claim. If he does, the credit should be foundation equity. If he does not, and if no liability arises, the receipt may be more vulnerable to being characterized as income.

Application to Corporate X Foundation

15. In Corporate X Foundation, Mr X is not merely the founder. He is also the sole beneficiary. Under the assumed facts, he has a right to distributions and a residual entitlement to the Foundation’s net assets on termination after liabilities and expenses are settled.
16. These rights are not shares. They should not be described as share capital. However, they may represent a claim on the residual interest of the Foundation. The fact that the claim is created by the foundation charter, by-laws, regulations or beneficiary provisions rather than by ordinary shares should not prevent it from being an equity claim for IFRS purposes.
17. Accordingly, Mr X may be treated as contributing assets in his capacity as the holder of the residual beneficial claim in the Foundation. If that analysis is accepted, the endowment falls within the exclusion from income for contributions from holders of equity claims.
18. This treatment should not be understood as treating the Foundation as a company with share capital. It is not. The point is narrower and more precise: the Foundation has residual net assets, and the founder-beneficiary holds the relevant residual beneficial claim. The contribution is therefore a capital contribution to the Foundation’s equity, not income.

Liability analysis

19. Before concluding that the endowment is credited to equity, it is necessary to exclude liability treatment.
20. Under CF 4.26, a liability is defined as a present obligation of the entity to transfer an economic resource as a result of past events. CF 4.27 further explains that a liability exists only where the entity has an obligation, the obligation is to transfer an economic resource, and the obligation is a present obligation arising from past events. IAS 32 may also be relevant by analogy where the foundation documents or related arrangements create enforceable rights to receive cash or another financial asset. In particular, IAS 32.11 defines a financial liability by reference to a contractual obligation to deliver cash or another financial asset, while IAS 32.16 treats the absence of such a contractual obligation as central to equity classification.
21. If the Foundation has a present obligation to return the contributed assets, repay their value, redeem the contribution, or make fixed and mandatory distributions to Mr X, the credit may need to be classified as a liability in whole or in part.
22. However, liability treatment would still not normally produce taxable income at the time of receipt. If the receipt of the asset is matched by a liability, there is no increase in equity and therefore no income in profit or loss. The tax result would still generally be that there is no Accounting Income and, absent a special Corporate Tax adjustment, no Taxable Income from the receipt itself.
23. On the assumed facts, there is no fixed repayment obligation, no mandatory redemption right and no obligation to return a fixed amount. The liability analysis therefore does not displace equity classification.

Corporate Tax treatment for non-transparent foundation

24. where Corporate X Foundation is not treated as a tax-transparent Family Foundation under Article 17, the Foundation may itself be a Taxable Person for UAE Corporate Tax purposes. The question would then be whether the endowment is included in its Taxable Income.
25. The better view is that it should not be included. The reason is that the endowment is not Accounting Income. It is recorded directly in foundation equity as a contribution from the holder of the residual beneficial claim. Since Article 20 starts from Accounting Income, and since there is no specific adjustment requiring such a capital contribution to be brought into Taxable Income, the receipt should not be taxed in the Foundation’s hands.
26. The same result would apply, although for a different accounting reason, if the transaction were classified as the receipt of an asset with a corresponding liability. In that case too, there would be no income in profit or loss at the time of receipt.
27. Therefore, even without Article 17 tax transparency, the core position is that a properly documented founder-beneficiary endowment should not be taxable merely because the Foundation receives assets.

Corporate Tax treatment for transparency scenario

28. The argument becomes even stronger where the Foundation has been approved to be treated as a tax-transparent Family Foundation under Article 17 of the Corporate Tax Law.
29. Article 17 allows a qualifying Family Foundation to be treated as an Unincorporated Partnership for Corporate Tax purposes. The effect is that the Foundation is not taxed in its own right in the same manner as an ordinary opaque juridical person. Instead, the relevant income and tax items are considered at the level of the beneficiaries or other relevant persons, according to the applicable transparency mechanism.
30. However, transparency does not create income where there is no income. It attributes income and tax-relevant items where such items exist. It should not convert a capital contribution into taxable income merely because the contributor is also the beneficiary.
31. In Corporate X Foundation, the endowment is not recognized as income of the Foundation under IFRS. It is credited to the foundation equity. Therefore, there is no Foundation income from the endowment to attribute to Mr X under the transparency rules.
32. Treating the same endowment as income of Mr X would be conceptually circular. Mr X contributes his own assets to the Foundation. He does not receive consideration from the Foundation. He does not sell the assets to the Foundation. On the assumed facts, he does not conduct a UAE Business or Business Activity in relation to the transfer. The transparent status of the Foundation should not turn Mr X’s own contribution of capital into income attributed back to him.
33. Therefore, where Article 17 transparency applies, there are two reinforcing reasons for non-taxation. First, the Foundation should not itself be taxed in its own right. Secondly, there is no income item arising from the endowment to be attributed to the founder-beneficiary.

Conclusion

34. The better view is that the endowment by Mr X to Corporate X Foundation should not give rise to UAE Corporate Tax either at the level of the Foundation or at the level of Mr X.
35. In the basic, non-transparent scenario, the receipt should not be included in the Foundation’s Taxable Income because it should not be recognized as income in profit or loss under IFRS. It should be credited directly to foundation equity as a contribution from the holder of the residual beneficial claim. Absent a specific Corporate Tax adjustment, there should be no Taxable Income.
36. In the Article 17 transparent scenario, the position is even stronger. The Foundation should not be taxed in its own right, and the transparency rules should not convert a non-income capital contribution into taxable income of the founder-beneficiary.

The disclaimer

Pursuant to the MoF’s press-release issued on 19 May 2023 “a number of posts circulating on social media and other platforms that are issued by private parties, contain inaccurate and unreliable interpretations and analyses of Corporate Tax”.

The Ministry issued a reminder that official sources of information on Federal Taxes in the UAE are the MoF and FTA only. Therefore, analyses that are not based on official publications by the MoF and FTA, or have not been commissioned by them, are unreliable and may contain misleading interpretations of the law. See the full press release here. You should factor this in when dealing with this article as well. It is not commissioned by the MoF or FTA. The interpretation, conclusions, proposals, surmises, guesswork, etc., it comprises have the status of the author’s opinion only. Furthermore, it is not legal or tax advice. Like any human job, it may contain inaccuracies and mistakes that we have tried my best to avoid. If you find any inaccuracies or errors, please let us know so that we can make corrections.