Investment funds are organizations that gather money from investors and distribute it among different assets like stocks, fixed income, real estate, or commodities and are centered in the United Arab Emirates (UAE). Investment funds' primary objective is to provide income or returns for their shareholders, who share in the fund's performance—positive or negative. Various investment fund formats are possible, depending on the tax, legal, and regulatory landscape in various nations. Investment funds are eligible for a favorable tax environment in the United Arab Emirates if they meet specific standards and adhere to applicable rules. The fundamentals of qualifying investment funds, typical investment fund forms, and the tax ramifications of various investment kinds will all be covered in this blog post.
What Are Qualifying Investment Funds?
As per Article 10 of the Corporate Tax Law, “ a qualifying investment fund is a unique kind of fund that, under certain circumstances, is free from UAE corporate tax law. A corporate entity is that:
- The primary objective of obtaining funds by issuing investment interests, pooling investor funds, or creating joint investor funds is referred to as a qualifying investment fund.
- seeks to give investors the chance to share in the earnings or gains made from the entity's investing activities, which include buying, holding, managing, and selling assets.
- obeys all applicable laws and rules in the United Arab Emirates.
- Any type of vehicle that satisfies the requirements can serve as a qualifying investment fund, including partnerships and corporate entities.
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.
What Are The Different Forms/Structures Of Investment Funds?
Various investment fund formats are possible, depending on the tax, legal, and regulatory landscape in various nations. The most typical investment fund structures in the United Arab Emirates are
- Limited Partnerships: Partners make up the different forms of investment funds under UAE law that are modeled as limited partnerships. The limited partners are passive investors who provide capital and split the fund's gains and losses, while the general partners are in charge of overseeing the enterprise and are accountable for all of its liabilities. The majority of investors prefer limited partnerships because they provide flexibility, transparency, and tax neutrality.
- Corporate Entities: Moreover, investment funds may be organized as corporations in the form of Real Estate Investment Trusts (REITs), Limited Liability Companies, or Joint Stock Companies. Corporate entities are governed by the UAE's disclosure and corporate governance laws and have their own distinct legal identity. Corporate companies could offer investors greater security and protection, but they might also come with extra expenses and complexity.
- Unincorporated Vehicles: Investment funds can also be set up as unincorporated entities like contractual funds, unit trusts, or other types of agreements. Unincorporated vehicles are controlled by the parties' agreed-upon contractual agreements and lack a separate legal identity. Unincorporated entities could offer investors greater simplicity and flexibility, but they might also come with more dangers and unknowns.
Requirements for UAE Investment Fund Qualification:
The Cabinet issues decisions outlining the requirements needed to qualify.
- Regulatory Oversight: The investment fund or its manager must follow the rules set forth by a foreign authority that is recognised or by a competent authority in the United Arab Emirates.
- Market Accessibility: Investment fund interests must be extensively marketed and available to investors, or they must trade on an approved stock exchange.
- Intent: Under UAE company tax laws, the investment fund's main goal should not be tax evasion.
Requirements for Corporate Tax Exemption:
Investment Focus: The main business activity of the investment fund should be the investing manager; all other operations should be considered secondary.
- Ownership Structure: In funds with less than 10 investors, no single investor or their Related Parties may own more than 30% of the company; in funds with 10 or more investors, this may be up to 50%.
- Management Requirements: Investors should not oversee the day-to-day operations of the fund; instead, an investment manager with a minimum of three investment professionals must manage or advise it.
Benefits/Advantages Of Qualifying Investment Fund:
Under certain circumstances, Qualifying Investment Funds are a unique kind of investment fund that is free from UAE Corporate Tax. Investing in Qualifying Investment Funds has several advantages, including:
- Tax efficiency: By postponing or avoiding paying taxes on their investment income and gains, Qualifying Investment Funds can assist investors in lowering their tax obligations.
- Diversification: Through qualifying investment funds, investors may have access to a variety of assets, including stocks, bonds, property, and commodities, that might not otherwise be available or reasonably priced.
- Professional management: Specialists who can choose, oversee, and maximize the performance of the investee businesses or enterprises oversee the Qualifying Investment Funds.
- Control: Qualifying Investment Funds give investors complete control over their finances because they let them sell or withdraw their investments whenever they want, as long as they abide by the fund's rules and regulations.
Table: Criteria for Qualifying Investment Funds
| Criteria | Details |
|---|---|
| Definition | Investment funds recognized as qualifying for specific tax treatments under UAE corporate tax |
| Tax Rate | Typically subject to 0% corporate tax if criteria are met |
| Eligible Funds | Includes mutual funds, pension funds, and similar collective investment schemes |
| Criteria for Qualification | Must be registered and regulated by a competent authority |
| Regulatory Compliance | Adherence to UAE Securities and Commodities Authority (SCA) or other relevant regulatory bodies |
| Exemptions | Income from qualifying investment funds may be exempt from corporate tax |
| Reporting Requirements | Must comply with specific reporting and disclosure obligations |
| Investor Eligibility | Open to both domestic and foreign investors |
| Types of Investments | Can include a wide range of asset classes such as equities, bonds, real estate, etc. |
| Tax Benefits | Provides tax deferral benefits until withdrawal or distribution |
What Are The Risks Associated With The Qualifying Investment Funds?
There are certain dangers associated with investing in Qualifying Investment Funds which include:
- Capital risk: Qualifying Investment Funds are vulnerable to changes in the market and could see a decline in value over time, particularly if the businesses they invest in don't achieve their goals or continue to qualify.
- Liquidity risk: Because qualifying investment funds may have restricted or limited redemption rights or trading opportunities, they may be less liquid than other kinds of assets.
- Regulatory risk: The UAE's laws and regulations, which are susceptible to change in the future, apply to qualifying investment funds.
What Does “Qualifying Investment” Refer to?
A qualified investment uses pretax income, usually as a contribution to a retirement policy. Taxes on these funds are deferred until the investor withdraws them.
It's important to consider a few things when doing business. First things first, make sure that income that is credited to resident investment managers and the investment fund is appropriately adjusted and accounted for. Second, as it relates to business operations, find out from the investment manager whether they are covered by UAE Corporate Tax legislation or if they satisfy certain legal requirements to be categorized as investment-related. Finally, keep in mind that for ancillary operations to remain classified as such, their combined revenue must not surpass 5% of the overall revenue for the fiscal year. By keeping these things in mind, you can simplify company processes and make sure that applicable tax regulations are followed.
Salah is a qualified Tax Consultant with over 5 years of experience gained in distinct intricate tax matters, he has high expertise in conducting tax negotiations and investigations with the Federal Tax Authority and other external Tax Bodies. He is well-versed with reviewing and drafting tax documents, upon tax preparation and filing. Salah has also advised on a plethora of tax matters, he draws much attention to tax filing procedures and to offering professional investigations to underlying tax complexities.
