The Quantum and magnitude of investment in a country, directly or indirectly contribute to the economic growth of a country. The amount of investment is directly proportional to the growth of economic activity in a country.
UAE is the most preferred choice to set up an Investment Fund due to its tax-free status. Recognizing that, the Corporate Tax regime has provided tax exemptions to the investment fund on fulfillment of certain conditions. This would continue to make UAE a most preferred attractive choice to set up various investment funds.
Exemption from Corporate Tax
In order to claim exemption from corporate tax, the following conditions are required to be met by an Investment Fund:
1. Regulated funds
Firstly, the Investment Fund must be regulated by one or more regulatory authorities in the UAE. Thus, an unregulated fund will not be eligible for exemption under the corporate tax law.
2. Maximum holding for 5 or fewer investors
A group of five (5) or fewer investors (and their Related Parties) should not hold 50% or greater economic interest in the investment fund.
3. Maximum holding for an individual.
A single investor (and their Related Parties) should not hold 20% or greater economic interest in the investment fund.
4. Freely traded funds
Interest in the investment fund (i.e. interest held by investors in the investment fund) should be freely traded on a stock exchange, whether on UAE stock exchange or a foreign stock exchange. Sufficient liquidity must be available for the fund in the market.
These are the tax benefits given to investment funds:
1. Investment funds to be treated as Fiscally Transparent
Under the corporate tax regime, investment funds in UAE would be considered as fiscally transparent. This would imply that the investment fund will not be liable to be taxed in the individual capacity. The tax liability would arise in the hands of investors on their share of distributed income.
Investment Funds enjoy the status of a pass-through business structure. Hence, the obligation to pay tax on income is transferred to the investors, if they are liable to tax, and the fund itself has no tax liability in respect of its income.
2. Regulated investment funds and Real Estate Investment Trusts
Regulated investment funds and real estate investment trusts funds where, on fulfilling certain prescribed conditions, they can make an application to the Federal Tax Authority (FTA) to avail of the exemption from the corporate tax.
3. Investment fund manager based in UAE
It has been provided in the corporate tax law that even if investment fund managers are based in the UAE and are providing services to a foreign investment fund, it will not be treated as the permanent establishment of such a fund in the UAE.
This provision is intended to promote and encourage investment fund managers to set base in the UAE.
Other Investment & Business SPVs
Family office structures are growing at a high pace, especially in Middle Eastern families. Legal and regulatory frameworks with respect to setting up family offices in the UAE have already been laid down. Family Foundations are prima facie subject to Corporate Tax since they are separate legal entities.
If the family offices are engaged in carrying out any activity under a business license or permit, then their income from such business activity would be subject to corporate tax.
If the incomes of family offices comprise any income other than from business activity under a commercial license, viz. dividend, capital gains, rent from properties, etc., then such incomes would not be taxable.
They have an option to apply to the Authority for being treated as an Unincorporated Partnership. Resultantly, the founder and the beneficiary of the trust shall continue to be seen as owners of the assets held by the trust and no corporate tax would be levied on the income of the foundation or trust.
REIT and Investment in Property
The introduction of federal corporate tax will have a direct impact on real estate activities in the UAE. Taxability under corporate tax law will be determined based on the nature and purpose of investment.
Income earned by individuals from investment in real estate held in their own name for personal use may be exempted.
Whereas, income earned from real estate investment through corporate structures may be subjected to corporate tax. Further, any business activity connected with real estate management and brokerage activity will be covered under the tax ambit.
As far as REITs are concerned, it is provided in the corporate tax law that these may apply for exemption from applicability of corporate tax on satisfying certain conditions.