“Handle With Care: How Sharia Law and U.S. Tax Law Affect the Foundations Regime in the United Arab Emirates”

Abstract

The United States tax classification of a “foundation” created under the laws of a foreign jurisdiction is a complicated matter. “Foundations” are not creatures of common law, but are derived from civil law. The United States follows common law and this body of jurisprudence is more familiar with the concept of a trust. A “foundation” has elements of both a trust and a corporation and determining the United States tax classification of a foreign foundation can be tricky. When Sharia law impacts the structure, the complexities can grow. My article examines all of these issues as they relate to the newest foundations regime enacted in the United Arab Emirates.

The United Arab Emirates is essentially a tax-free jurisdiction and with its free zones providing 100% foreign ownership, it is fast becoming an international business hub. The Emirates now has 3 foundations regimes in place, with the most recent being launched in the Emirate of Ras Al Khaimah. This article provides an overview of the foundations regimes available in the United Arab Emirates, with particular attention to the latest regime and how Sharia law and US tax rules affect the use, structure, and efficiency of foundations.

Proper structuring with a foundation can mean not only very favorable tax results, but strong asset protection as well as a unique opportunity for business and succession planning. The United Arab Emirates’ latest foundations regime provides an excellent planning mechanism for Muslims and non-Muslims, resident or nonresident and for local and foreign assets.

This is my second article analyzing the United States tax issues and consequences when transactions involve Sharia law. This is an uncharted area of law, unaddressed by the U.S. Internal Revenue Service, the U.S. courts and U.S. Congress. My first article “When Sharia and U.S. Tax Law Collide”, Tax Notes International, Volume 87, No. 8, August 21, 2017 is also available on SSRN.

Keywords: US taxation, entity classification, foundations, trusts, foreign foundation, foreign trust, international

JEL Classification: K, K33, K34