UAE Federal Tax Authority issues Tax Guide for Investment Funds and Investment Managers

Introduction

In May 2024, the UAE Federal Tax Authority (FTA) issued an Investment Funds and Investment Managers Guide (IFIM Guide) for purposes of Corporate Income Tax (CIT). The IFIM Guide provides for the methodologies and clarifies the relevant conditions for Fund Investors and Investment Managers to achieve tax neutrality and obtain tax exemptions. Because of the booming investment funds space in the UAE, the publication of the IFIM Guide is extremely helpful for investors and businesses operating in that sector.

Tax neutrality Investment Funds

Investment Funds come in a wide variety of shapes and forms such as private equity funds, venture capital funds and hedge funds, among others. In recent years, the UAE has become a favoured location for many Investment Funds and Investment Managers, often seeking commitments from the UAE’s cash-rich Sovereign Wealth and Pension Funds. The UAE’s CIT regime, which applies a standard rate of 9%, recognizes the importance of tax neutrality for Investors deploying capital into Investment Funds. As such, the CIT regime includes mechanisms to achieve tax neutrality between direct investments, and investments made through Collective Investment Vehicles by not subjecting the income of such (Fund) vehicles to CIT. For Unincorporated Partnerships, which are treated as (pass-through) transparent for tax purposes, the investments and the related income are attributed to the Investors directly. For Investment Funds that are organized as non-transparent (i.e., opaque) partnerships and legal entities, tax neutrality is achieved through a specific exemption under the CIT regime.

Qualifying Investment Fund

Investment Funds that are structured as legal entities, or opaque partnerships, can apply to the FTA for a CIT exemption as a Qualifying Investment Fund (QIF), subject to the following conditions:

• The Investment Fund or the Investment Fund’s manager is subject to the regulatory oversight of a competent authority in the UAE, or a recognized foreign competent authority,
• Interests in the Investment Fund are (a) traded on a recognized stock exchange, or (b) marketed and made available sufficiently widely to investors,
• The main or principal purpose of the Investment Fund is not to avoid CIT,
• The main activity of the Fund must be investment business (any other activities should be secondary or incidental),
• The Investment Fund should be managed or advised by an Investment Manager with at least three investment professionals,
• Investors should not have control over the Fund’s daily management.
• With respect to ownership, (a) if the Fund has less than ten (10) investors: no single investor and their related parties should own over 30% of the Fund, and (b) if the Fund has ten (10) or more investors: the ownership by a single investor and related parties should not exceed 50%.

The IFIM Guide provides useful clarifications and examples on some of these conditions. The IFIM Guide also introduces a new mechanism on how Investment Funds should distinguish their various income streams, and how investors in such Funds must subsequently report such items of income for UAE tax purposes. Based on the IFIM Guide, a QIF must allocate the amount reflected as net income available for distribution in its financial statements into the following four categories:

• exempt income;
• interest income;
• income from immovable property in the UAE; and
• other income

Exempt income typically includes dividend income from UAE resident shareholdings, and (other) dividend and capital gain income from shareholdings which qualify as Participating Interest, under the UAE’s participation exemption regime.

Investors in a Qualifying Investment Fund

According to the IFIM Guide, investors in a QIF who are subject to UAE CIT must include their proportional share of the net income available for distribution, as shown in the QIF’s financial statements, in their own taxable income.

As a result, to the extent the income relates to net exempt income, this should also be treated as exempt income for the investor. Any proportional amount of net interest income will be treated as interest income for such investor and could be taxable depending on the investor’s profile for tax purposes. The net income from immovable property in the UAE could create a taxable nexus for an investor that is a non-resident legal entity. All other income will be included in the taxable income of the investor, where relevant. Any distributions made by a QIF should not be included in the income of the investor who is a taxable person, to the extent that net income available for distribution was already previously included in the income of that investor for tax purposes.

The fact investors need to track the different income streams from a QIF, in order to determine their own obligations under the UAE’s CIT regime (if any), means that UAE tax compliance for investors has become more complex.

Entities owned by Qualifying Investment Funds

Upon application with the FTA, UAE legal entities that are wholly owned by a QIF can also apply to be exempt from CIT, if they (i) undertake part or whole of the activity of the QIF, (ii) engage exclusively in holding assets or investing funds for the benefit of the QIF, or (iii) only carry out activities that are ancillary to those carried out by the QIF. The QIF exemption’s extension to such Special Purpose Vehicles (SPVs) is very helpful in practice, as many Investment Funds use SPVs to structure their (ultimate) investments.

Investment Manager Exemption

The IFIM Guide provides an exemption that allows Investment Managers to provide discretionary investment management services, and to enter into transactions on behalf of foreign customers, without triggering a taxable presence (i.e., a permanent establishment) in the UAE for the foreign investor or foreign investment entity. This exemption emphasizes the UAE’s goal of creating a business-friendly environment for Investment Managers as well as fund investors.

Conclusion

The recently issued Investment Funds and Investment Managers Guide provides welcome clarification on the Corporate Income Tax position and exemptions for Funds, Fund Managers, and Investors.