Qualifying Investment Funds for Corporate Tax UAE

Investment funds take money from investors and use it to make investments based on a set of rules. The investors then get a cut of the gains. These funds can be made up of different groups of people and businesses, like companies or partnerships, and they can be based in the UAE or somewhere else. Mutual funds, hedge funds, and real estate funds are all common types of investment fun

What is a Qualifying investment fund?

In the UAE, a Qualifying Investment Fund (QIF) can ask to be excused from corporate Tax if it meets certain requirements in the Corporate Tax Law.

• Not subject to corporate tax: If a QIF meets the requirements and is granted relief, it does not have to pay corporate tax.
• Group relief and restructuring Restrictions. The QIF cannot use Qualifying Group Relief, Business Restructuring Relief, or the rules for transferring tax losses.
• Separate from Tax Group: The QIF can’t be a part of a Tax Group.
• Keeping Records and Filing an Annual statement: The QIF has to keep records for at least seven years and file an annual statement to make sure it still meets the requirements for exemption conditions.

What are the conditions for Qualifying Investment Funds?

A QIF is an investment fund (IF) when the following requirements are satisfied under Article 10 of the corporation tax law:

• The IF or its manager is subject to regulatory scrutiny from a competent body in the UAE or a foreign country.
• Interests in the IF are exchanged on a reputable stock exchange, or they are advertised and made generally available to investors.
• The primary objective of the IF is not to avoid corporation taxes.

According to the cabinet decision, the following IFs (other than real estate investment trusts (REITs) will be excluded from corporation tax:

• The fund will be principally involved in investing business operations, with auxiliary or incidental activities accounting for no more than 5% of total annual income.
• A single investor’s and its connected parties’ ownership shares in the IF cannot exceed 30% (when the IF has less than ten investors) or 50% (when there are ten or more investors). Furthermore, this criterion shall be regarded met for the first two fiscal years and non-binding after that, providing it can be demonstrated.
• It is controlled by an investment manager who employs at least three investment experts.
• Investors do not control the fund’s day-to-day management.

Regarding REITs, in addition to the basic rules specified in the corporation tax legislation for QIFs outlined above, the following specific exemption conditions apply:

• Real estate assets, excluding land owned by the REIT, surpass AED100 million in value.
• A minimum of 20% of its share capital is publicly listed or wholly owned by two or more institutional investors (as specified in Article 5 of the cabinet decision), including the federal or local government, government entity or government-controlled entity, foreign government, bank, insurance provider, pension or social security funds, and so on.
• An average real estate asset proportion of at least 70% is maintained each year.

What are the risks associated with qualifying investment funds?

There are several risks involved with investing in Qualifying Investment Funds, including:

Capital risk: Qualifying Investment Funds are subject to market movements and may lose value over time, especially if the firms they invest in do not meet their objectives or continue to qualify.

Liquidity risk: Qualified investment funds may be less liquid than other types of assets due to limited redemption rights or trading possibilities.

Regulatory risk: Qualifying investment funds are subject to UAE rules and regulations that may change in the future.

How QIF taxes handled, and what needs to be reported?

QIFs that match the above conditions are free from UAE Corporate Tax, but they must comply with a variety of reporting requirements. Investors in QIFs must include their proportionate part of the fund’s net income in their personal taxable income. The QIF’s income streams must be classified as exempt income, interest income, income from immovable property, and other income under UAE tax legislation.

• Exempt income includes profits from UAE residents and eligible foreign assets.
• Interest Income: Income derived from investing activity.
• Income from Immovable Property: Income from real estate investments in the UAE that may result in tax liability for non-residents.

Compliance requirements

Compliance is important to sustaining QIF status:

• QIFs must keep complete records for at least seven years and file yearly declarations showing compliance with exemption conditions.
• Any changes in structure or ownership that might compromise the QIF’s status must be disclosed to the UAE Federal Tax Authority.

Conclusion

Qualifying Investment Funds are crucial in the UAE’s corporate tax system, providing tax benefits provided certain requirements are met.The UAE aims to attract regional and worldwide investors by ensuring a transparent and well-regulated investment environment through strict QIF status standards. Entities interested in using this categorization must handle both the strategic management of their money and the intricacies of tax compliance to maintain eligibility.