Corporate tax impacts a diverse array of businesses and industries. With the introduction of a new regime in the UAE, comprehending the laws and regulations is imperative. Avoiding penalties and ensuring the seamless operation of businesses is a primary concern. Among the focal areas of corporate tax, investment funds hold significant importance in the UAE. The investment funds sector covers various entities such as mutual funds, exchange-traded funds, hedge funds, and more.
What is an Investment Fund?
An investment fund is a pool of investments that allows investors to collectively invest their money in a diversified portfolio of assets. These include stocks, bonds, real estate, commodities, or other securities. Skilled fund managers oversee these investment funds, utilizing their expertise to select and manage a diverse array of investments. However, it’s imperative that these activities align with relevant legislation.
Corporate Tax for Investment Funds in the UAE
Certain investment funds may get exemption from corporate tax as an entity; however, there are certain rules to consider:
Investment funds treated as Unincorporated Partnerships
Typically, investment funds are organized as limited partnerships to secure tax neutrality for their investors. This neutrality is supported by the prevalent practice in most countries worldwide, recognizing limited partnerships as transparent for tax purposes. In this structure, the fund positions investors as if they had directly invested in the asset. Therefore, for the purpose of corporate tax, investment funds that are structured as partnerships, unit trusts, or other unincorporated vehicles will be treated as unincorporated partnerships. Unincorporated partnerships are generally exempt from corporate tax as an entity; however, each partner is subject to taxation based on their individual circumstances.
Investment funds structured as Corporate Entities
Investment funds structured as corporate entities, such as Real Estate Investment Trusts (REITs), seeking to be recognized as taxable person for corporate tax purposes can request exemption through the Federal Tax Authority (FTA), provided they meet specific criteria. Similarly, partnership funds may also qualify for a comparable exemption, subject to meeting particular requirements.
Qualifying Investment Fund
As per Article 4 Clause 1(f) of the corporate tax law, a qualifying investment fund is exempt from corporate tax. However, it is subject to the conditions described in Article 10. An investment fund may get an exemption from corporate tax if it applies to the Authority and meets all of the following conditions:
a) The investment fund or the fund’s manager is subject to competent regulatory oversight by an Authority in the state. Or a foreign competent authority oversights the investment fund or the investment fund’s manager.
b) A recognized stock exchange trades the securities of the investment fund. If not, they are marketed and available to a wide variety of investors.
A recognized stock exchange includes any stock exchange that is licensed and regulated by a competent Authority in the UAE. For instance, Nasdaq Dubai, Dubai Financial Market, etc. It also includes foreign stock markets that are similar to or in equal standing to stock exchanges in the UAE.
c) The primary reason for the investment fund is not to avoid corporate tax.
d) Any further condition prescribed by the Cabinet at the recommendation of the Minister.
The investment fund is responsible for maintaining ongoing compliance with the set conditions to retain its exemption status. The Authority may request information and documentation from the investment fund to oversee and assess compliance with these conditions.
Conclusion
As the UAE introduces new tax regulations, understanding the implications of corporate tax on investment funds is crucial for businesses. The diverse landscape of investment funds, including various structures such as limited partnerships and corporate entities like REITs, demands adherence to specific tax rules. Notably, the concept of a “Qualifying Investment Fund” holds significance, requiring compliance with conditions outlined in the corporate tax law to secure an exemption. As a business or an investor, it’s necessary to familiarize oneself with the legal and regulatory prerequisites of corporate tax.
Creative Zone Tax & Accounting
There are areas where we recommend getting professional advice. If you are a businessman who invests in an investment fund, we can assist you with corporate tax matters. Exemption from corporate tax for an investment fund does not mean that you, as an investor, are exempt from corporate tax. If you have any confusion, feel free to contact us for your tax status.
