Taxation of investment funds: Key considerations for investors and funds

The UAE’s corporate tax law seeks to ensure tax neutrality

By Sheetal Soni

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UAE, Corporate tax, UAE business, Dubai corporate
UAE, Corporate tax, UAE business, Dubai corporate

Published: Sun 23 Jun 2024, 4:02 PM

Last updated: Sun 23 Jun 2024, 9:35 PM

Investment funds encompass a wide range of financial products, aligning with offerings found in global markets. These funds include public funds, accessible to the general public, and private funds, which are exclusive to professional investors. Investment funds pool capital from investors and invest it collectively according to a defined investment policy. In return, investors share the profits of the fund. Often, an investment manager is appointed to make investment decisions on behalf of the fund, guided by a pre-agreed investment policy and procedures. Sometimes, these activities are undertaken by an investment advisor or a general partner.

The UAE’s corporate tax law seeks to ensure tax neutrality, positioning investors in investment funds similarly to those making direct investments in the underlying assets. This approach aligns with international standards, where tax systems often provide neutrality between direct investments and investments through collective investment vehicles, thereby avoiding taxation or onerous compliance obligations on the income of such entities.

Investment funds classified as resident juridical person are subject to corporate tax in the UAE. However, they can apply for exemption as a qualifying investment fund, if they meet certain specific conditions. One of them includes regulatory oversight by the Dubai Financial Services Authority — regulator of the Dubai International Financial Centre (DIFC), Financial Services Regulatory Authority — regulator of Abu Dhabi Global Market (ADGM), or Securities and Commodities Authority (SCA), or any recognised foreign competent authority.

Additionally, these funds must not primarily aim to avoid corporate tax and should have their interests traded on a recognised stock exchange. If the interest is not traded on the recognised stock exchange, the same should at least be marketable/marketed and made available widely to investors. Notably, an investment fund can only seek this exemption after registering with the Federal Tax Authority as a taxable person. Once the application is approved, the qualifying investment fund will be exempt i.e. it will not be subject to corporate tax. However, for each individual investor holding ownership in a qualifying investment fund, any distributable income will be taxed if the investment is part of their business activities i.e. requiring a license or falling under commercial business laws. If the investment is personal, the income from the fund remains untaxed for the individual investor. For instance, a natural person based in UAE, investing in a qualifying investment fund, using his personal savings and earning investments income (for which no licence is required). Since the income derived by natural person is a personal investment income, the same would not be subject to corporate tax.

Sheetal Soni Partner MICS International
Sheetal Soni Partner MICS International

Furthermore, investment funds treated as Unincorporated Partnerships are by their nature not being classified as juridical persons, thus exempting them from being taxable persons. Instead, the income from these partnerships is considered earned by the partners for tax purposes. The partners, however, may apply to the Federal Tax Authority for the partnership firm to be treated as a separate taxable person, i.e. one which is fiscally opaque.

Funds established as juridical persons outside the UAE are not regarded as resident persons unless managed and controlled within the UAE. However, they would be subject to corporate tax if they have a permanent establishment, state sourced income, or other nexus in the UAE. The concept of nexus applies exclusively to non-resident juridical persons. Such entities establish nexus in the UAE when they derive income from immovable property within the country.

There are certain reliefs under the tax laws, which are granted to resident juridical person subject to certain conditions. However, a qualifying investment funds by virtue of its exemption cannot opt for such reliefs. For instance, qualifying investment funds are excluded from forming part of a qualifying group for group relief purposes. Additionally, they are not entitled to business restructuring relief for the transfer of an entire business or a segment thereof. Furthermore, these funds cannot benefit from provisions for the transfer of tax losses and are prohibited from forming part of a tax group.

Overall, the UAE’s approach ensures a tax-neutral environment for investment funds, aligning with international practices and promoting fairness. This framework facilitates the growth and competitiveness of the UAE’s investment fund sector, benefiting both local and global investors.

The writer is Partner — MICS International

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