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Trusts have recently been introduced by Free Trade Zones as legal and fiscal instruments. Although they existed before, they were not widely applied. One of the most well-known types of trusts, both in the family and in the business environment, is the Common Law Trust.
Over time, Trusts have evolved into tools that provide efficient tax and legal protection, and are key to estate and business planning.
Before delving into its operation, it is important to note that a Trust should not be confused with a Holding. For detailed information on Holdings, see:Holding in Spain
A Trust is a legal structure that is not classified as a natural or legal person. It is generally composed of:
Trustee (who provides the assets).
Trustee (who manages the assets and has their legal ownership).
Beneficiaries (who receive the benefits of the Trust).
A Trust can include multiple trustees and beneficiaries, as well as different categories of beneficiaries.
The trustor transfers the assets to the trustee, who acquires legal ownership, but always for the benefit of the beneficiaries. Although the trustee has control over the management and distribution of assets, the real purpose is to benefit the beneficiaries.
A Trust, since it is not considered a natural or legal person, has a particular tax treatment. Although the assets legally belong to the trustee, the beneficiaries are the effective owners.
In most jurisdictions, Trusts are treated as independent entities for tax purposes, and the trustee is required to file a separate tax return for the Trust.
In the United Arab Emirates (UAE), Trusts are not subject to income tax. However, your tax residence depends on the characteristics of the entities that constitute it, particularly the residence of the trustees.
For example: If a Trust is created in the UAE, but all the trustees reside in Spain, it will be subject to the tax laws of Spain and not the UAE. This can lead to residency conflicts between jurisdictions, but international tax conventions can resolve them.
It is essential that the trustor consult with a tax advisor before making contributions to the Trust, as these may result in additional tax obligations, such as gift tax.
To maintain the UAE's favorable tax treatment, it is crucial to:
1. Appoint trustees resident in the UAE.
2. Opt for corporations or foundations incorporated in the UAE as trustees.
This ensures that the Trust's income and distributions are not subject to taxation, even if the beneficiaries do not reside in the UAE.
A trustee has a fiduciary responsibility to act in the best interests of the beneficiaries, following the wishes of the trustor according to the Trust's constituent document.
In discretionary trusts, it is common to include a protector, a figure who can advise or replace the trustee if necessary.
When choosing a trustee, it's essential to:
- Ensure effective communication with the beneficiaries and the protector.
- Maintain consistent and transparent management.
- Ensure stable fiscal residence.
In most jurisdictions, a Trust has a duration limited to 21 years, known as the rule against perpetuity. However, in the United Arab Emirates there is no such limitation, allowing assets to remain in the Trust indefinitely without creating additional tax obligations.
Trusts are highly versatile legal and tax instruments that provide wealth protection and efficient planning. Its proper management depends on key factors such as the choice of trustees, tax residency and regulatory compliance.
If you want more information, schedule a free consultation and answer all your questions about Trusts through the link below.
