Clarifying “Similar Entities”: Insights from the Family Foundations Guide (May 2025)

New guidance from the FTA: what counts as a “Similar Entity”?

The FTA’s now sets out the following working definition: ‘A similar entity is one that is intended to be used for the administration of family wealth and that is not a commercial company’.

This introduces a dual test:

1. Purpose-based condition, according to which the entity must be used for the administration of family wealth.
2. Exclusionary condition, which disallows a commercial company to apply for transparent status.

This supports the interpretation that “similarity” is determined not just by the legal structure but by its intended purpose and activity.

“Commercial company” criterion

The most debated issue following the release of the Guide is what the FTA means by “commercial company.” The concept of a “commercial company” may still be interpreted through two distinct lenses:

• Formal Approach, under which a company or other legal entity that has obtained a commercial license, or is registered under legislation that classifies such entities as “commercial companies,” would automatically fall within the exclusion. Merely holding this status would be sufficient to breach the prohibition against commercial companies, regardless of the entity’s actual activities.
• Substance-Based Approach, which requires a deeper analysis of the entity’s licensed activities and actual operations. It distinguishes entities whose sole permitted activities would not constitute “Business” or “Business Activity” under the Corporate Tax Law if carried out by a natural person. This functional interpretation focuses on the underlying purpose the structure is intended to serve (the management of personal or family wealth) rather than relying solely on formal classification.

Formal Approach

Section 3.1 of the FTA’s Family Foundations Guide No. CTGFF1 states that ‘the … criterion … [of] being a foundation, a trust or a similar entity, relies on the relevant (non-tax) legislation’.

Article 9(1) of Federal Law No. 32 of 2021 on Commercial Companies defines the typical legal forms (e.g., LLCs, joint stock companies, federal general and limited partnerships) that are covered. By this reasoning, a mainland LLC, regardless of purpose, could be disqualified merely because it is incorporated under the Commercial Companies Law.

However, Article 5 of the same law provides that companies established in free zones may fall outside its scope, if such exclusion is expressly provided in the applicable free zone laws or regulations. This raises two critical questions:

1. Does free zone companies regulations override the “commercial” label?
2. Is a mainland LLC, even one with no economic activity and exclusively used for family wealth management, automatically disqualified?

The answer to the first question appears to be yes, but only if the free zone regulations do not replicate the “commercial” label. Nonetheless, even where free zone legislation is silent on this label, the classification may still emerge through licensing characteristics.

For example, the DMCCA Companies Regulations do not define all companies as “commercial” nor use the term “commercial companies” explicitly. Yet, licensing rules embed commercial attributes:

• The DMCCA Licensing Rules (Article 3.1.1(c)) require a “Commercial License” for activities such as SPV operations, holding company functions, single and multi-family office activities.
• As such, even entities used for private wealth structuring could be issued commercial licenses, which may trigger disqualification under the FTA’s exclusion for commercial companies.

Moreover, the commercial classification may arise from other regulatory instruments. For instance, the Federal Law No. 37 of 20 September 2021 on the Commercial Register stipulates that ‘persons subject to this Decree Law shall submit an application for registration in the Commercial Register…’. Unlike the Commercial Companies Law, this law applies to both mainland entities and free zone companies that carry out economic activities. Thus, any entity engaging in such activity and appearing in the commercial register might be treated as a commercial company based on its registration in Commercial Register alone.

In summary, under the Formal Approach, entities may face exclusion from Family Foundation status based on:

• Their legal form under the Commercial Companies Law;
• Their commercial license issued by a regulatory authority;
• Their inclusion in the commercial register pursuant to federal legislation.

This interpretation may exclude even passive investment vehicles unless carefully structured or reclassified.

Substance-Based (Functional) Approach

In contrast to the formalist view, the substance-based interpretation focuses on what the entity actually does, rather than how it is labeled or registered. focuses on the intent behind the law. This approach requires identifying the problem the statute was designed to address and interpreting the law in a way that resolves that issue.

The General Corporate Tax Guide No. CTGGCT1, in Section 5.6, explains the rationale behind the special treatment of Family Foundations:

• ‘There are a number of different structures that are used to manage personal wealth and investments for asset protection, succession, philanthropic and other reasons. These include, for example, a contractual trust, a private trust company or a foundation to hold and manage personal assets and investments’.
• It continues: ‘Whilst some of these structures and arrangements are by default treated as fiscally transparent for Corporate Tax purposes, some types of trusts and foundations have a separate legal personality, such as foundations established in ADGM or DIFC. These types of entities are treated the same as any other juridical person, with their income being within the scope of Corporate Tax. Where these types of entities are merely used to hold and manage personal assets and wealth on behalf and for the benefit of beneficiaries who are natural persons, this will result in an inconsistent treatment compared with if instead the natural persons were to hold and manage the assets directly’.
• To address this inconsistency, the Guide states: ‘Therefore, entities that are considered as “Family Foundations” for Corporate Tax purposes can, subject to meeting certain conditions, apply to the FTA to be treated as an Unincorporated Partnership... If the application is approved, the Family Foundation will be treated as tax transparent and the beneficiaries would be seen as directly owning or benefiting from the activities and assets of the Family Foundation’.

This explanation highlights the core policy objective: to eliminate unjustified disparities in tax treatment between direct ownership by natural persons and ownership through a legally separate entity, where the entity’s only function is to hold and manage wealth on their behalf.

Accordingly, even if an entity possesses the formal characteristics of a commercial company, such as being an LLC or holding a commercial license, it may still qualify as a “similar entity” if:

• Its purpose and actual activities are limited to holding and managing personal assets and investments, and
• Those activities would not constitute a “Business” or “Business Activity” if conducted directly by the individual beneficiaries.

Put differently, a company that carries a commercial label but does not engage in activities that would amount to Business or Business Activity for a natural person, may still be treated as functionally equivalent to a trust or foundation.

Thus, under the substance-based approach, it is not the legal form or license that determines eligibility, but rather the nature of the activities, intent of the structure, and its alignment with the personal wealth management function that the Corporate Tax Law seeks to address through Family Foundation relief.

The FTA’s commentary in Section 3.2 of the Family Foundations Guide emphasizes that foundations generally do not hold commercial licenses. However, it explicitly accepts that a DIFC “operating licence”, issued even to non-commercial foundations, does not disqualify an entity:

“… a foundation registered in DIFC, in accordance with DIFC Law No. 3 of 2018, is issued an operating licence as per DIFC Law No. 7 of 2018. This licence is defined in the DIFC Operating Regulations as ‘a licence issued by the registrar to a registered person which does not carry out or propose to carry out commercial activities in or from DIFC.’ The existence of such a licence would not cause a foundation to fail the principal activity condition … or the no Business Activity condition…”

This suggests that the “non-commercial company” requirement is not an absolute classification, but rather a mechanism to ensure that two key conditions are met:

1. The entity’s principal activity aligns with passive wealth and asset management; and
2. The entity does not conduct activities that would amount to Business or Business Activity under the Corporate Tax Law if performed by a natural person.

While DIFC foundations meet these conditions by default due to their licensing restrictions, the same standards could be satisfied by certain companies that formally hold commercial licenses if:

a) Their licensed activities are limited to investment-related functions that would not qualify as Business or Business Activity if carried out directly by their individual shareholders; or

b)  Their constitutional documents or bylaws restrict their operations to those that inherently satisfy the No Business Activity test.

The FTA elaborates on these two tests in Sections 5.2 and 5.3 of CTGFF1:

• Principal Activity Condition: ‘The principal activity of the foundation, trust, or similar entity must be to receive, hold, invest, disburse, or otherwise manage assets or funds associated with savings and investments’.This condition reflects Article 17(1)(b) of the Corporate Tax Law.
• No Business Activity Condition: ‘An entity must not conduct an activity that would have constituted a Business or Business Activity if undertaken by a natural person. This is to ensure that a foundation, trust, or similar entity is used for its intended purpose of managing investments and not to conduct a Business or Business Activity on a commercial basis… In respect of a natural person, Turnover derived from Wages, Personal Investment income, and Real Estate Investment income is not considered to be derived from a Business or Business Activity. The foundation, trust, or similar entity may, therefore, undertake an activity that would be considered Personal Investment and/or Real Estate Investment had it been undertaken by the natural person beneficiaries directly’.

Therefore, the example provided in Section 3.2 of CTGFF1 offers reassurance that the FTA does not apply a blanket rule based on formal licensing status. Instead, it appears willing to assess the substance of the entity’s activities, allowing for the possibility that even companies with commercial attributes may qualify (if their actual operations mirror the intended purpose of a Family Foundation).

Towards a Functional Understanding of “Similarity”

While the term “similar entity” remains only partially defined in the legislation, the FTA’s guidance permits a purposive, substance-over-form approach to interpretation. Specifically:

1. Entities that do not conduct business and are not commercial in character may qualify.
2. Entities that effectively invest on behalf of their individual shareholders, and whose modus operandi aligns with the Principal Activity and No Business Activity conditions applicable to Family Foundations, may also qualify (even if incorporated under the Federal Commercial Companies Law).
3. The overarching goal of the regime (eliminating tax treatment inconsistencies between individuals and the legal vehicles through which they manage personal wealth) supports a functional, purpose-driven test.

Uncertainty does remain, particularly with respect to non-commercial LLCs, SPVs, or family holding companies. However, in the absence of an explicit prohibition, a strong case can be made for qualification where:

• The company’s founding documents or bylaws expressly limit its activities to those that would not constitute Business if conducted directly by the individual shareholders; and
• The entity is clearly used for wealth management, succession planning, asset protection, or philanthropic purposes.

Ultimately, the determination of eligibility lies with the FTA’s application process. Until further clarification is issued, a reasoned and well-documented application grounded in the substance-based approach offers a promising path forward.

As outlined in Section 8.2 of the CTGFF1, a juridical person that qualifies as a Family Foundation may apply to the FTA to be treated as an Unincorporated Partnership. The application must include:

• Details of the beneficiaries, and
• A formal confirmation that all relevant conditions are met, including the condition of being a foundation, trust, or similar entity.

Where an entity carries the label of a “commercial company,” it should proactively take a position that this label does not reflect the actual substance or purpose of the structure. The legal and tax arguments presented above should be tailored to the specific facts and documentary evidence available in each case to support the request for favorable treatment. Even a rejection may bring useful clarity for future restructuring or compliance planning.

Alternatively, an entity may seek a private clarification from the FTA before submitting a formal application. In such cases, a robust technical position, supported by a comprehensive tax opinion and a balanced discussion of alternative interpretations, will be essential to increase the chances of a favorable outcome.

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 I have tried my best to avoid. If you find any inaccuracies or errors, please let me know so that I can make corrections.