Article on Investment Fund and Investment Manager Exemption

Introduction

This article provides clarity on various aspects of Corporate Tax Law considering Tax Guide on Investment Funds and Investment Managers issued by the Federal Tax Authority (FTA).

What is Investment Fund?

In general terms, investment fund pools fund received from investors on a collective basis in accordance with a defined investment policy. In return, investors share in the profits of the investment fund.

Types of Investment Fund

Taxability of Investment Fund

Investment Entities being Resident Person is Taxable Person in the Sate. Investment Fund can be exempt by meeting the specific conditions mentioned at later slide and application for exemption is approved by FTA.
Unincorporated Partnerships are not taxable person unless registered as separate taxable person by the Investors (Partners). In such case, the fiscally opaque can apply for exemption being Qualifying Investment Fund.
Non-Resident Investment Fund is taxable;
On income attributable to a Permanent Establishment. in case of earning State sourced income through withholding of tax by withholding agent. However, withholding tax rate is 0%. having Nexus in the UAE (earning income from immovable property).

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Conditions for being Qualifying Investment Fund

An investment fund is regarded as QIF if following conditions are fulfilled;

In addition to above conditions, additional conditions under Cabinet Decision No. 81 of 2023 (not applicable on REITS) are follows;

For a new fund, compliance is assumed for the first two years if fund demonstrates intent to meet conditions. If compliance is not achieved by the third year, the tax exemption is revoked starting from the beginning of the third financial year.
The investment fund is managed by Investment Manager having three investment professionals not necessarily be full time employee. This condition will still be met if Investment Manager has no or limited staff and all of its functions are subcontracted to one or more companies in the business of managing investment fund.
The investors do not have control over day-to-day management of the investment fund.

Additional conditions under Cabinet Decision No. 81 of 2023 for REITS are follows;

REIT real estate asset’s minimum value excluding land is more than AED 100 million. Value of the real estate to be determined on carrying value in the financial statements of REIT.
At least 20% of the REIT share capital is floated on a Recognized Stock Exchange or directly wholly owned by two or more institutional investors (specified in Article 5 of the Cabinet Decision No. 81 of 2023) provided that at least two of such institutional investors are unrelated party.

Consequence of Qualifying Investment Fund

When an Investment Fund is qualified by meeting the conditions then it means:

Investment Fund is no more Taxable Person1.
Investment Fund is not eligible for other reliefs provided under the Corporate tax Law such as Qualifying Group Relief2, Business Restructuring Relief3, Transfer of Tax Losses4 and forming a Tax Group5.
Any tax losses or unutilized net interest expenditure prior to obtaining the exempt status cannot be utilized while the QIF has exempt status. If the exempt status is changed to taxable in a later tax period, only the tax losses or unutilized net interest expenditure from that tax period onwards can be utilized.
An annual declaration is to be filed not later than nine months from the end of relevant tax period.
All records are required to retain for 7 years following the tax period to which they relate.

Taxable Person: A Person subject to Corporate Tax in the State as per provision of Article 11 of this Decree-Law.
Qualifying Group Relief: No gain or loss needs to be taken into account in determining Taxable as per provision of Article 26 of this Decree-Law.
Business Restructuring Relief: No gain or loss needs to be taken into account in determining Taxable as per provision of Article 27 of this Decree-Law.
Tax Losses: Any negative Taxable Income as per provision of Chapter 11 of this Decree-Law.
Tax Group: Two or more Taxable Persons treated as a single Taxable Person according to the conditions of Article 40 of this Decree-Law.

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Other Key Points

Allocation of income at QIF

QIF must allocate the net income available for distribution in its financial statements into four categories:
Exempt income: Includes dividends from resident juridical persons (excluding dividends received from exempt persons), dividends from foreign participation interests and capital gains, etc., in relation to participation interests.
Interest income.
Income from immovable property in the UAE.
Other income: Any net income available for distribution that is not categorized as exempt income, interest income, or income from immovable property in the UAE

Treatment of distributions

Any distribution made by a QIF is not included in the income of an investor being a Taxable Person, to the extent that net income available for distribution was already previously included in the income of that investor.

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