Trusts are most popular for estate and wealth planning and can be used as a planning tool for both tax and non-tax reasons. UAE is a no income tax jurisdiction and with the introduction of recently introduced onshore trust law may become the strongest competitor in establishing trust-based estate and wealth planning structures among the other no-tax jurisdictions. Foreign assets and foreign beneficiaries are allowed under the UAE Trusts Law. Trusts are also used as asset protection and succession tools.
UAE witnessed a new Trust law during September last year to support the onshore wealth management sector when President Sheikh Khalifa bin Zayed enforced much needed Federal Law No.19 of 2020.
The undersecretary of the Ministry of Finance, Younis Haji Al Khouri announced in a press briefing noting, “The decree-law regarding trusts was an important addition to the UAE’s advanced legislative structure.”
He also said, “The onshore Trust law supports the wealth management sector in the country and provides new mechanisms for managing companies and family funds. It also encourages the allocation of charitable trusts.”
It is noteworthy that two financial free zones in the country, the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM), already have trust laws based on English common law. Now for the first time, the UAE government recognised the country’s vast onshore private wealth and has allowed this financial model within the onshore wealth management system.
A ministry official remarked that this new trust law will allow both onshore companies and individuals to transfer their wealth to a trustee through a special document which is recorded electronically to reflect the assets if movable or property. The deed will mention the settlor, trustees and beneficiaries and document the responsibility and authority of the trustee and the details of the property.
As per the ministry the new initiative ‘was an important addition to the advanced legislative structure of the UAE’ and will help the financial sector to integrate with global financial industries and be more competitive with new avenues for managing funds.
The necessary tools for administering the new trust law are already being implemented by the UAE government. The trust registry for family businesses has been established and is currently being done for private trusts.
Legal financial products including private family trusts, real estate investment trusts, securities, investments and mutual funds are already familiar to the UAE citizens and there was already a public demand for such a law. Although these products were available in the two financial free zones, the trust arrangements didn’t effectively deal with and establish ownership over UAE onshore assets such as cash, securities, land and moveable assets.
This new law will hugely benefit the family-owned company as this empowers the founders to do succession planning for securing the future of their businesses, assets and descendants in the long run.
Besides dealing with the securities for charitable and private trusts on financial markets, the new law will also include retirement funds to provide financial security to the beneficiaries in exchange for contributions to trust once they cease to work.
The law will help bridge some gaps in the onshore legal system in the country and will accelerate developments in onshore laws and practices. The country’s financial legislation will be stronger and more effective.
Preservation and investment of huge capital within the country will also be assured with the introduction of trust law.
The law has been aligned with the regulatory structure and best practices of the wealth management industries in advanced countries strongly emphasising investor protection and will help increase the confidence of the investing community.
A trust structure is established when the settlor, legal owner of assets transfers legal ownership of those assets known as the trust property to an individual or a company called the trustee and for the benefit of some persons as the beneficiaries. Once established, the legal ownership of the trust property will lie with the trustee with beneficial ownership vested upon the beneficiaries.
There are different types of trusts including public trusts, private or family trusts or public cum private trusts based on the types of beneficiaries. However, trusts can also be formed without any beneficiaries for charitable and non-charitable purposes.
A foundation is based on civil law and is an independent legal entity with characteristics of both a corporation and a trust. It doesn’t have shareholders and there is a Council that manages the foundation following its charter and regulations.
There are mainly three types of foundations viz Charitable foundations, Private foundations and Corporate foundations.
Tax treatment of trusts can be quite complicated because it is a legal relationship and straightforward taxation doesn’t apply as an individual or business entity. Though the trustee is the legal custodian of the trust assets, they essentially belong to the beneficiaries of the trust.
Trusts are treated as individuals in many tax jurisdictions and the trustee needs to file a tax return for the trust besides filing their tax return.
As a no-tax jurisdiction, UAE doesn’t levy any income tax on trusts. However, if a UAE trust has settlers, trustees and beneficiaries who are residents of high tax jurisdictions in other countries, the trust can be considered as ‘ deemed tax resident’ and would be liable for payment of tax and filing tax returns. The settlors of a UAE trust may be liable for gift tax.
As the resident status of trust is primarily determined by the residence status of the trustees, a UAE trust with trustees who are UAE residents can enjoy tax-free status. If a DIFC trust has trustees with a tax residency certificate in Dubai, the trust can earn tax free income even when the beneficiaries of the trust are not UAE residents.
As the foundation is treated as a legal person, taxation is relatively easier. However, if a non-resident controls the foundation, the country of residence of the controller may be considered as the residence of the foundation.
Tax planning of a trust can be simple when both the trustees and beneficiaries are UAE residents. However, when they are residents of other tax jurisdictions, the trust deed must be documented and phrased very wisely and carefully for ensuring that the tax advantage is preserved. Similar measures must be followed for ADGM foundations as well.
Though UAE has reached DTAA agreements with many countries, most of these tax jurisdictions don’t mention taxation of trusts very clearly and comprehensively. Considering taxation of trusts as hugely complicated affairs, expert consultations are often recommended as a necessity.