UAE Corporate Tax update: cabinet decision on qualifying investment funds

Article 4 of the Federal Decree Law No. 47 of 2022 – Taxation of Corporations and Businesses (“the CT Law”) inter-alia provides the list of persons who shall be exempt from Corporate Tax (“CT”). The list of persons mentioned under this Article also includes a Qualifying Investment Fund meeting conditions laid out under Article 10 of the CT Law.

A Qualifying Investment Fund (“QIF”) has been defined under Article 1 of the CT law, as any entity whose principal activity is issuing of investment interests to raise funds or pool investor funds or to establish a joint investment fund, with the aim of enabling the holder of such an investment interest to benefit from the profits or gains from the entity’s acquisition, holding, management or disposal of investments, in accordance with the applicable legislation and when it meets the conditions set out in the aforesaid Article 10.

Article 10 stipulates mandatory conditions to be met by any investment fund for seeking an exemption from levy of corporate tax by the Federal Tax Authority (FTA). These conditions include existence of regulatory oversight of a competent authority on the functioning of the investment fund or investment funds manager, trading of interests in the investment fund on a recognized stock exchange and ensuring that the main purpose of the investment fund is not to avoid corporate tax. Article 10, also empowered the Cabinet to prescribe any other conditions by way of issuance of a separate Cabinet decision. The Cabinet has recently issued Decision No. 81 of 2023 prescribing certain additional conditions, which are required to be complied with by QIF for claiming exemption from levy of CT. These are summarized as under:

1. 1. Conditions for claiming exemption by investment fund:
2. 1.1  Together with the conditions prescribed under Article 10 of the CT Law, an investment fund, other than a Real Estate Investment Trust (REIT) shall comply with all the following conditions to make an application to the FTA or Authority seeking an exemption from CT:
   1. Carrying out investment business or activities, which are ancillary or incidental to carrying out investment business activities.
   2. A single investor together with its Related Parties (Related Parties are defined in Article 35 of the CT Law) shall not own in an investment fund:
      1. More than 30% of the ownership interests, where the investors are less than ten (10).
      2. More than 50% of the ownership interests, where the investors are at-least ten (10) or more.
   3. An investment fund is managed or advised on by an Investment Manager having a minimum of three investment professionals.
   4. Investors shall not be controlling the day-to-day management (affairs and operations) of the investment fund.

1. 1.2  For the purposes of business activity of investment fund, the following must be considered:
   1. Taxable income of resident Investment Manager from business attributable to a resident investment fund shall be calculated according to Article 20 of the CT Law.
   2. Business activities of an Investment Manager attributable to Resident Investment fund shall be treated as investment business activities provided:
      1. It is subject to CT through the Investment Manager, or
      2. The Investment Manager shall be working on an independent basis for and on behalf of non-resident person together with complying with other conditions provided in Article 15(1) of the CT Law.
   3. Revenue from ancillary or incidental business activities shall not exceed five percent (5%) of the total revenue of the investment fund in the same financial year. Ownership interest conditions (as provided above) shall be deemed to have been complied with by the investors, during the first two financial years of establishment of investment fund, where the investors satisfactorily demonstrate their intentions to comply with the conditions after the completion of first two years as determined by the Authority. Where the conditions of ownership interests as provided herein are not complied with, the exemption shall stand withdrawn from the beginning of the third financial year of establishment of the investment fund.

1. 2. Conditions for claiming exemption by REIT: together with the conditions prescribed under Article 10 of the CT Law, REIT shall comply with all the following conditions to make an application to FTA seeking an exemption from CT:
   1. REIT manages or owns real estate assets, other than land, of value exceeding AED 100,000,000/- (United Arab dirhams One Hundred Million); and
   2. A minimum of twenty percent (20%) of share capital of the REIT is floated on a Recognized Stock Exchange or is directly owned by a minimum of two institutional investors who are not related parties.
   3. REIT shall have a minimum average real estate asset of 70% during the relevant 12-month period for which the financial statements are prepared.

1. 3. Income of investor: income of a taxable person as an investor in QIF, for the relevant tax period shall be calculated in proportion to its ownership interest in QIF. Where income from QIF has previously been included following the accrual principles, the same shall not be considered again on receipt basis.

1. 4. Institutional Investor: an Institutional Investor may, inter-alia, include either of (i) federal government or local government or foreign government, (ii) government entity or government controlled entity, (iii) international organization, bank, an insurance provider, pension or social security fund, (iv) investment entity licensed by relevant competent authority (UAE or outside UAE) (v) Any other juridical person determined by the Authority.

1. 5. Unincorporated Partnership: where an unincorporated partnership is considered a taxable person under Article 16 of the CT Law, it shall be considered an entity under the definition of QIF under the CT Law.

1. 6. Necessary implementation of decisions are awaited to be issued by the Minister of Finance. This decision shall come into force the day following its publication in the Official Gazette.

Key takeaways: The subject cabinet decision provides the eligibility conditions of ownership and functioning of both an Investment Fund and Real Estate Investment Trust to seek exemption from levy of corporate tax after obtaining from the UAE’s FTA.

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