New UAE FTA Corporate Tax Guide for investment funds and investment managers

The UAE Federal Tax Authority (“FTA”) has released a corporate tax guide CTGIFM1 on Investment Funds and Investment Managers (the "Guide"). The Guide discusses in detail how the corporate tax law should apply to investment funds, investors, and investment managers. The UAE is a home for two world-renowned financial centers for setting up an investment fund: Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM). The importance of the Guide cannot be overestimated.

The Guide states that its purpose is to clarify the Corporate Tax Law, although the Guide is not binding, it provides a useful insight on the following:

• The meaning of Qualifying Investment Fund (“QIF”) and Investment Manager
• Conditions for a QIF to be exempt from Corporate Tax
• Conditions for a Real Estate Investment Trust (“REIT”) to be exempt from Corporate Tax
• Corporate Tax implications for an investor investing in a QIF
• Conditions for a foreign person to benefit from the Investment Manager Exemption, and relevant Corporate Tax compliance requirements for the above

The Guide clarifies the treatment of different forms of investment funds (e.g. incorporated and unincorporated, foreign and domestic).

The Corporate Tax Law seeks to ensure neutrality such that investors of an investment fund are in a similar Corporate Tax position as if they had invested directly in the underlying assets of the fund. For example, investment funds that are structured as Unincorporated Partnerships will be treated as transparent for Corporate Tax purposes which generally achieves an outcome similar to one where the ultimate investor had invested directly. For investment funds that are not structured as Unincorporated Partnerships, a similar outcome may be achieved by exempting the investment fund from Corporate Tax as a QIF, i.e. there would be no tax at the level of the investment fund itself and only the investors would be taxed on the investment returns depending on their status. There are complex rules on taxation of investors, including treatment of distributions from the fund, disposal of the participation in the fund etc., some of these are illustrated in the Guide by simplified examples. The Guide also clarifies treatment of more complex structures such as parallel funds and feeder funds.

The Guide lays out the requirements for QIF and investment managers to obtain and maintain exempt status, as well as the consequences of failing to meet these conditions. The Guide elaborates on how a fund can qualify as a QIF or a REIT.

QIF enjoy exemption from Corporate Tax provided all of the following conditions are met:

• The investment fund or the investment fund’s manager is subject to the regulatory oversight of a competent authority in the UAE, or a foreign competent authority.
• Interests in the investment fund are traded on a recognized stock exchange, or are marketed and made available sufficiently widely to investors. In particular, this test should be met if a single investor and its related parties do not own: (1) More than 30% of the ownership interests in the investment fund, where the investment fund has less than ten investors; (2) More than 50% of the ownership interests in the investment fund, where the investment fund has ten or more investors. The tax legislation envisages a grace period of two years to meet these criteria.
• The main or principal purpose of the investment fund is not to avoid Corporate Tax.
• The fund carries on investment business activities, and any other business or business activities conducted by the investment fund are ancillary or incidental.
• The investment fund is managed or advised by an investment manager that has a minimum of three investment professionals.
• The investors shall not have control over the day-to-day management of the investment fund.

Corporate tax compliance requirements are detailed in the Guide, including the process for applying for exemption and the earliest effective date for such applications. QIF must apply for exemption within six months of the end of their initial tax period or within six months of meeting exemption criteria, whichever is later. If exemption criteria are met throughout the tax period, the exemption becomes effective from the period's outset.

Considering all the above, incorporating an investment fund in the UAE should consider potential tax implications based on its legal structure (incorporated or unincorporated). Additionally, existing fund operations should be reviewed to assess eligibility for QIF tax exemption.