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

Proud to announce publication of my article Handle With Care: How Sharia Law and U.S. Tax Law Affect the Foundations Regime in the United Arab Emirates in Tax Notes International (TNI) Vol. 98 No. 5 May 4, 2020. Available at no cost on SSRN. The article discusses the US tax treatment of the newest “foundations” regime in the United Arab Emirates (UAE) and the impacts of Sharia law.  The interplay of US tax and Sharia often arises in the UAE, where I have been based for many years.

US Tax Classification of a Foreign “Foundation”

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; determining the United States tax classification of a foreign foundation can therefore be tricky.  The ultimate classification will make a huge difference to the US tax impact on any US person involved with the foundation – whether a founder, contributor, beneficiary, guardian or council member.

Sharia Law & US Tax

When Sharia law impacts the structure, the complexities can grow.  There is, however, absolutely no guidance from the US Internal Revenue Service, the US courts, or the US Congress on the issues that arise when Sharia law and US tax law intersect.  My article examines all of these issues as they relate to the newest foundations regime enacted in the United Arab Emirates.  I will be breaking down the analysis in smaller blog posts over the coming weeks, so watch for them.

It should be noted here that principles of Sharia are very often followed in financial transactions on a daily basis in America. US multinational companies engage in such transactions both directly and indirectly through their foreign affiliates. US financial institutions have Islamic finance departments.  General Electric, Goldman Sachs and the World Bank have all issued sukuk,  a commonly used instrument in Islamic finance. Major financial firms like PIMCO and Fidelity are active participants in the sukuk market. The average Muslim-American buys homes in the US with Sharia-compliant mortgages or takes out Sharia-compliant student debt to attend school.

The topic should not be viewed as a matter of religion because this will stymie constructive discourse. Rather, the entire topic should be viewed as a call for action on the part of the US to guide tax professionals and taxpayers in remaining compliant when Sharia impacts their transaction.

Benefits of 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.  My recent 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. With proper use of a foundation, this entity may provide a solution for US persons holding foreign assets and having foreign family members or for the foreign family with some US persons as potential heirs.

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 US Internal Revenue Service, the US courts and US 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.

Posted: May 21, 2020

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