UAE CT: No Corporate Tax For Qualifying Investment Funds
Mahar Afzal
CEO and Founder at KRESS COOPER, KCOLLS.com, KCELS.com I Entrepreneur | Angel Investor | Expert in Compliance (Corporate Tax, VAT, etc. ) | Writer | Educator | Trainer | Risk-Taker | Education Enthusiast
An investment fund is a financial vehicle that gathers capital from various investors to create a diversified portfolio of assets, including stocks, bonds, real estate, and commodities. When you invest in a fund, your money is combined with that of other investors. A fund manager is then responsible for purchasing, holding, and selling investments on your behalf.
UAE investment funds comprise both public (available to the general public) and private funds (only offered to professional investors), which can be categorized as either open-ended (with variable capital) or closed-ended (with fixed capital). Various parties participate in investment funds, including investors, trustees, investment managers, and investment sub-advisors.
Tax-registered investment funds that apply to the Federal Tax Authority (FTA) for corporate tax exemption are referred to as Qualifying Investment Funds (QIF) upon receiving FTA approval. Only juridical investment funds are eligible for this exemption, as the income of natural person investment funds like unincorporated partnership, is already exempt at the fund’s level.
The FTA grants approval for investment funds to be classified as QIF if the fund or its manager is under the regulatory oversight of a competent authority, if interests in the investment fund are traded on a recognized stock exchange or are widely marketed to investors, and if the primary purpose of the investment fund is not to evade corporate tax.
Additionally, Cabinet Decision No. 81 of 2023 specifies that, aside from Real Estate Investment Trusts (REITs), the primary business of the investment fund involves conducting investment and related activities. If there are ten or fewer investors, a single investor and their related parties must not hold 30% or more of the portfolio. In cases with more than ten investors, no single investor along with its related parties should hold 50% or more of the investment portfolio. The fund must be managed by an investment manager with at least three investment professionals, and investors should not have control over the daily management of the investment fund.
QIFs are exempt from corporate tax because the investors in an investment fund are treated similarly to those who have invested directly in the underlying assets. This arrangement eliminates taxation at the investment fund level, ensuring that only the investors are taxed on their net investment returns on a proportional basis.
The QIF will distribute the net income available for distribution, as shown in its financial statements, across four categories: exempt income, interest income, income from immovable property in the UAE, and other income.
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Exempt income encompasses dividend income from resident juridical persons (excluding dividends from exempt persons) and income from participating interests when the relevant conditions are satisfied. Interest income refers to amounts accrued or paid for the use of money or credit. Income from immovable property, as indicated by its name, includes the net income available for distribution from immovable property in the UAE. Other income consists of net income that does not fall into the categories of exempt income, interest income, or income from immovable property in the UAE.
As mentioned above, the QIF is exempt from corporate tax, and its net income will generally be taxable for investors according to general tax rules. For individual investors, this income will not be subject to tax, while for juridical persons, exempt income will remain tax-exempt, taxable income will be taxable, interest income will be governed by the standard rules applicable to interest and so on.
The investment manager oversees the fund and earns income through brokerage fees and management fees. This income will be taxed in the regular course of business. If the fund manager is a resident juridical person, their worldwide income will be subject to tax. Conversely, if the fund manager is a non-resident juridical person, their UAE-sourced income will be subject to a 0% withholding tax, unless it qualifies as a permanent establishment (PE) of non-resident person (investment manager exemption conditions are not met as required under article 15 of the corporate tax law), in which case the income attributable to the PE of the nonresident person will be taxed in the UAE.
The conditions required to qualify as a QIF must be continuously satisfied throughout the tax period. Additionally, the QIF must submit an annual declaration to the FTA within nine months after the end of the relevant tax period, confirming compliance with these conditions.
As an exempt person, the QIF cannot be included in a tax group or qualifying group, and it is unable to transfer its losses and enjoy benefit from any tax reliefs such as qualifying group relief or restructuring relief.
The writer, Mahar Afzal, is a managing partner at Kress Cooper Management Consultants. The above is not his official but personal opinion. For any queries/clarifications, please feel free to contact him at mahar@kresscooper.com.