No corporate tax for qualifying investment funds

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 categorised 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 recognised stock exchange or are widely marketed to investors, and if the primary purpose of the investment fund is not to evade corporate tax.

Additionally, the UAE Cabinet Decision No. 81 of 2023 specifies that, apart 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 per cent or more of the portfolio. In cases with more than ten investors, no single investor along with its related parties should hold 50 per cent 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 similar 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.

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.

The writer, Mahar Afzal, is a managing partner at Kress Cooper Management Consultants. The above article is not an official opinion of Khaleej Times but an opinion of the writer. For any queries/clarifications, please feel free to contact him at mahar@kresscooper.com.