Guide to DIFC Holding Company Tax and Succession

Holding Companies in DIFC Dubai Taxation and Succession

The Dubai International Financial Centre (DIFC) has become a global hub for businesses seeking to establish a strategic presence in the Middle East, Africa, and South Asia (MEASA) region. Among the many structures offered within this financial free zone, holding companies and foundations have emerged as essential tools for succession planning and corporate taxation. With new tax regulations on the horizon, these vehicles are increasingly seen as effective solutions for asset protection, tax efficiency, and ensuring smooth transitions in business ownership.

The Role of Holding Companies in DIFC

A holding company, commonly known as a prescribed company in DIFC, is primarily designed to hold assets and equity in other companies rather than engage in commercial activities. In the DIFC, holding companies serve as attractive vehicles for businesses looking to centralize their international operations in a tax-efficient jurisdiction. Some key benefits of setting up a holding company in DIFC include:

(i) Asset Protection:

DIFC holding companies provide robust legal frameworks to shield assets from external liabilities. Businesses can consolidate their global investments under one umbrella, reducing risks associated with individual jurisdictions.

(ii) Tax Efficiency:

While the UAE offers a favourable tax regime, the introduction of Corporate Tax in 2023 has increased interest in DIFC as a tax-efficient zone. Holding companies can benefit from the UAE’s wide range of double tax treaties, making it easier to repatriate profits or dividends at lower tax rates.

(iii) Corporate Governance:

Holding companies in DIFC are subject to internationally recognized regulations that ensure high standards of transparency and governance. This makes them ideal for businesses looking to enhance their credibility and compliance, especially in multi-jurisdictional setups.

Foundations in DIFC: A Tool for Succession Planning

Foundations are increasingly being used as flexible and innovative structures for succession planning in Dubai. Unlike trusts, which are primarily common law concepts, foundations are civil law structures, making them more familiar and appealing to clients from diverse jurisdictions. Foundations in DIFC are particularly useful for managing family businesses, safeguarding wealth, and ensuring smooth transitions across generations.

Some of the unique advantages of using a foundation in DIFC for succession planning include:

(i) Asset Separation and Control:

Foundations offer a distinct separation between ownership and control. This means that the founder can retain influence over the assets while ensuring they are transferred to beneficiaries according to their wishes. This separation is especially useful in family businesses where multiple generations are involved.

(ii) No requirement for probate:

Upon death, DIFC foundations are not required to obtain probate, allowing individuals/founders to distribute their assets as they see fit.

(iii) Wealth Preservation:

Foundations in DIFC are excellent tools for safeguarding assets from external claims, ensuring wealth preservation for future generations. This is particularly important for families with international assets and operations, as the foundation can serve as a central repository for these diverse holdings. Assets under the foundation can be preserved from any external liabilities if those assets are not generated from any illegal/criminal activities.

Corporate Taxation in DIFC: Recent Changes

With the UAE implementing a federal Corporate Tax of 9% starting from June 2023, businesses have had to rethink their strategies to maintain tax efficiency. DIFC remains a compelling option due to its free zone status, which offers certain tax exemptions and benefits, especially for holding companies and foundations.

As per Ministerial Decision No. (261) of 2024 from the UAE Ministry of Finance, holding companies that are structured in specific ways can apply for corporate tax transparency or exemption, provided they meet certain conditions. Specifically, suppose a holding company holds assets such as real estate, shares, or investments and is owned by a foundation. In that case, the company may qualify for this tax transparency or exemption if:

1. The holding company is established for the benefit of a natural person.

2. The primary intention of the holding company is to hold assets and generate benefits from them rather than engage in active business operations.

3. The holding company is not involved in any active commercial activities.

4. The company is not formed for the purpose of Corporate Tax evasion.

These conditions are essential for holding companies that want to continue benefiting from the tax-efficient environment in DIFC while ensuring compliance with UAE tax regulations. Holding companies that meet these criteria are well-positioned to optimize their tax liabilities while fulfilling their legal obligations.

No Inheritance Tax in the UAE

One of the key advantages of setting up a foundation or holding company in the UAE is the absence of inheritance tax. In the UAE, there is no inheritance tax when transferring wealth from one generation to the next. This makes succession planning more efficient and less costly, as family-owned businesses and assets can be passed down without being subject to additional taxes. This policy significantly benefits high-net-worth individuals and family offices that are looking to protect and transfer wealth across generations.

Succession Planning in a New Tax Environment

The introduction of corporate tax has shifted the conversation around succession planning, especially for high-net-worth families and business owners. In this new environment, businesses are looking for ways to protect their wealth and ensure that their assets are passed on to future generations without undue tax burdens. Holding companies and foundations in the DIFC offer practical solutions for both objectives.

Minimizing Tax Liabilities: By centralizing assets under a DIFC holding company, businesses can benefit from tax exemptions on dividends and capital gains, which may reduce the overall tax burden. Foundations, on the other hand, can provide tax-efficient wealth transfers, minimizing liabilities when passing assets to heirs.

Future-Proofing Business Operations: Succession planning is about more than just passing on assets—it’s about ensuring the continuity of business operations. DIFC foundations allow founders to establish clear rules for how their businesses should be managed after their passing, avoiding disputes and ensuring that their legacy is preserved.

Conclusion

The strategic use of holding companies and foundations in the DIFC provides significant advantages for businesses and individuals navigating the challenges of succession planning and corporate taxation. As Dubai continues to evolve into a global financial hub, these structures offer flexible, tax-efficient solutions that can protect assets, ensure smooth transitions of wealth, and future-proof businesses for generations to come.

For high-net-worth individuals and family-owned enterprises, exploring these vehicles within the DIFC framework is not only a prudent move but an essential step in safeguarding the future amidst a changing regulatory landscape. Whether for asset protection, tax optimization, or succession planning, DIFC’s legal and financial frameworks provide a robust foundation for long-term growth and stability.

Flying Colour Corporate Services DIFC Limited is a DFSA-regulated and DIFC registered Firm, Flyingcolour can advise on the registration of the foundation and holding company (Prescribed Company in DIFC, Flyingcolour will act as a registered agent and can provide a registered office address for foundations and holding companies

Flyingcolour can also advise on Corporate Tax applicability on DIFC-based foundations and prescribed companies for more client-specific advisory on the above subject, please contact us today

Flyingcolour Corporate Services (DIFC) is a DFSA-regulated and DIFC-registered firm.

To learn more about Holding Companies in DIFC Dubai Taxation and Succession book a free consultation with one of the Flyingcolour team advisors.

The article was published on 05/12/2024. It is important to note that the federal policies and updates mentioned may have changed since then. For the most current information, please contact our consultant.