Key conditions in UAE for Qualifying Investment Funds
To qualify as an investment fund under the Corporate Tax Law in the UAE, certain conditions must be met:
- An investment fund (IF) or investment manager is subject to the regulations of a competent investment authority in UAE or a foreign competent authority recognized for the exemptions under corporate tax law.
- Interest in the investment funds in UAE are traded through a recognized stock exchange or the funds are marketed and often made available at ease for investors.
- The main purpose of QIF is not to avoid Corporate Tax
- Any other conditions prescribed are issued at the Cabined under suggestions by the Finance Authority of UAE.
Conditions to exempt from Corporate Tax under Investment Funds
In accordance with UAE Corporate Tax Law, additional conditions are established through a Cabinet decision. In compliance with the specified requirements, the Ministry of Finance issues a Cabinet Decision, granting exemption from UAE corporate tax to investment funds, excluding REITs. The key conditions are outlined below:
- The main business or business activity must be related to investment business activity. Any other business or business activity practiced by the Investment Fund must be incidental or ancillary.
- A single investor or its related parties must not own more than 30% ownership interest in an investment fund where the IF has less than 10 investors. Or investors should not have more than 50% ownership interest in an investment fund, where the IF has 10 or more investors.
- Investment funds should be regularly managed or recommended by a professional investment manager who has a minimum of three investment professionals on staff.
- The investors do not have the right to control the daily management of the investment fund.
It is important to note that the definition of “investment business” for the exemption is the issuance of investment interests to raise funds or pool investor funds or establishing a joint investment fund. Furthermore, it enables the holder of said investment interest to capitalize on profits or gains arising from the entity’s acquisitions, holdings, management, or disposals of investments, as outlined in the relevant UAE legislation.
Supplementary Considerations for Business Activities
The Cabinet Decision mentions the detailed considerations related to business or business activities for QIF, excluding Real Estate Investment Trust (REIT). To apply for exemption under corporate tax law, one must meet with list of conditions including:
- If a resident Investment Manager’s business or business activities are assigned to a resident Investment Fund, the taxable income of the Investment Manager must be adjusted to reflect the taxable income assigned to the investment fund.
- An Investment Manager’s business or business activities, which are assigned to an investment fund managed by a resident person, are considered Investment Business activities if they are liable to corporate tax in the UAE via an Investment Manager. Or an Investment Manager which would satisfy the conditions under Article (15)(1) of the corporate tax law if the reference to a non-resident person in that provision were to be related to a resident person.
- The other Business or Business Activities shall be considered ancillary only if the combined Revenue of these Business or Business Activities is less than 5% of the overall Revenue of the Investment Fund for the same Financial Year.
Investment Funds under CT and ownership considerations
The Federal Tax Authority looks after whether the investment fund meets the ownership criteria in the first 2 years since its establishment. If the investment fund has accurate evidence to prove that investors intend to meet the considerations of ownership after the first 2 financial years outlined by the Authority.
In case, the Investment Fund does not meet the conditions, then it would not be treated as an exempted individual or business from the beginning of the 3rd Financial year of its establishment.
To sum up, the Finance Authority states that to provide flexibility to the Corporate Tax regime, the range of ownership (30% – 50%) for investment funds (other than REITs) will not be mandatory for the first two years of fund formation, as long as the intention to diversify is demonstrated after the first two years.
Key points of REIT Investment Funds
As per Cabinet Decision no 81, even a real-estate investment trust (REIT) can be exempted under Corporate Tax law as a qualifying investment fund, provided it meets a few conditions.
- Excluding land, the value of real estate assets under the ownership or management of REIT must exceed AED 100,000,000.
- A Real Estate Investment Trust (REIT) shall have a minimum of 20% of its share capital that is either listed on a recognized stock exchange or completely owned by at least two institutional investors referred to in the Decision (provided that at least one of the institutional investors is not a related party).
- REIT has an average real estate asset criteria of 70% during the relevant 12-month tenure for which financial documents shall be prepared.
Additional Factors for Investor Income in UAE
If a taxable person becomes an investor in a qualifying investment fund during a tax year, that taxable person’s income for that tax year is adjusted to reflect the income and expenses of qualifying investment funds as reported in their financial statements.
Additionally, the income should exclude any distribution received from the qualifying investment fund if it was previously included in the income record.
Institutional investors (as per updated Cabinet Decision of UAE)
- Local Government
- The Federal Government
- International organizations
- Foreign Government (including its government, entities completely owned by them, or institutes)
- Government controlled entity
- Insurance provider
- Social security fund
- Other juridical individuals recognized by authority
- An investment company that has been approved by a government or other regulatory body in or outside the United Arab Emirates.
Since the Corporate Tax Law is emerging in the UAE, businesses need to stay updated with the changes and developments in the tax regime to make accurate tax decisions for the organizations. N R Doshi & Partners tax consultants have been guiding for years to varied organizations in order to remain on the right track and make relevant financial decisions to save up from unwanted risks and penalties.
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