17 October 2023


In recent years, legislation in various Emirates of the UAE, including Dubai and Abu Dhabi, has been introduced to allow the creation of foundation structures. The foundation legislation joins other recent legislative changes relating to trusts and different types of corporate structures. These developments mean that there is now a varied and effective toolkit of options for clients considering how to pass on assets to the next generation and how to balance the sometimes competing questions of ownership and control.

Whilst the growth in options for succession planning in the UAE is a huge positive, those looking to use these structures should remain mindful of the impact of tax regimes in other jurisdictions. Whilst this article focusses on possible UK tax liabilities, regard should be had to any jurisdiction which a foundation (or trust, or company) may touch.

Where a foundation structure has some connection to the UK, it may become necessary to try to determine how the structure, or benefits received from the structure, may be subject to UK tax. 

How might a foundation be classified in the UK?

The intention in this article is not to go into the detail of how the foundation legislation in the different financial centres is drafted. However, taking the foundation legislation in the Dubai International Financial Centre as an example, it is clear that it has been drafted to be a hybrid between a traditional trust and a standard corporate entity. The legislation has taken the “best bits” of what a trust can offer and combined these with aspects of corporate law, with the aim of creating an entity that offers flexibility, certainty and asset protection when undertaking succession planning.

From a UK perspective, there is no equivalent to the foundation structure under UK law. There is also no tax legislation which directly deals with how a foundation, or benefits received from a foundation, may be taxed. When trying to determine how a foundation may fit into the UK tax regime, it is necessary to undertake a detailed look at the specific drafting of the documentation for the particular foundation in question and then determine whether it appears to be more like a trust, or more like a company. However, as the DIFC Foundation legislation has deliberately created a hybrid between a trust and a company, it is very difficult to classify a foundation as one or the other for the purposes of UK taxation, with the result that the UK tax position may be uncertain. 

In the past, HMRC has suggested that Liechtenstein foundations may be treated as trusts for UK tax purposes. However, this is of limited use when considering DIFC foundations because (1) DIFC Foundation law has numerous differences compared to Liechtenstein law and (2) even in its comments in relation to Liechtenstein trusts, HMRC notes that each structure must be analysed on its own facts.

The UK inheritance tax legislation in relation to settlements is drafted very broadly, and it appears likely that a foundation would be treated as a settlement (trust) for UK inheritance tax purposes. However, the classification may be different for other taxes (such as income tax, capital gains tax and corporation tax). 

Why is UK tax relevant?

The question may be asked as to why UK tax is relevant to a structure based in the UAE, but there are numerous ways in which such a structure may interact with the UK. The following is not a definitive list but serves to highlight some of the areas of interaction.

1. The foundation (or any underlying company) owns assets in the UK: due to the UK tax analysis (and the potential uncertainty of that analysis) it is not normally advisable for UK situated assets to be held directly by a foundation.

2. A potential beneficiary of the foundation is resident in the UK (or may become so in the future): the individual will need to understand how they may be subject to UK tax on benefits received from the structure whilst they are resident in the UK.

3. A potential council member of the foundation is UK resident: this could lead to questions around whether the foundation is managed and controlled from the UK and if it is, the foundation may be brought within the scope of UK tax. The analysis here will differ depending upon how many council members are UK resident and the exact powers of the council. This issue is equally applicable to a UK resident individual who holds any other role in relation to the foundation (for example, the role of the guardian).

4. Someone who is originally from the UK is looking to create and fund a foundation. Where an individual who is domiciled in the UK settles assets into a trust an immediate inheritance tax liability may arise at a rate of 20%. The trust may then be subject to ongoing inheritance tax liabilities during the course of its existence. Someone who is originally from the UK and has a UK domicile of origin, may well have retained that UK domicile despite living in the UAE for a significant number of years. If, for example, an individual who has retained their domicile of origin in the UK establishes a DIFC Foundation to hold their real estate in Dubai, and if that foundation is treated as akin to a trust by HMRC, then there will be an immediate 20% charge on assets transferred into the foundation. The same analysis would apply if the individual in question wanted to create a trust to hold their Dubai property.


In summary, even where a UAE structure is being established by a UAE resident to hold assets situated in the UAE, tax consequences in the UK (and other jurisdictions) may arise. The position in the UK Is potentially difficult to analyse, due to the UK not having an equivalent to a foundation structure. This can lead to uncertainty in the tax analysis. Advice should be taken as soon as possible in the process, to mitigate (as far as possible) the UK tax risks and UK tax uncertainty.

Key contact

Emma Heelis-Adams

Emma Heelis-Adams Partner

  • Private Client Services
  • International Tax
  • HNW and UHNW Individuals

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