UAE’s VAT exemption on fund management is just what domestic funds need

The UAE’s recent decision to exempt fund management services from VAT for funds incorporated in the country is a calculated move.

This is more than just a tax break; it reflects the UAE’s strategic aim to strengthen its financial sector by attracting both local and foreign investors to establish funds within its borders.

What Does the VAT exemption cover?

Fund management services include activities like portfolio management and pension fund management. Previously, these services in the UAE were subject to a 5% VAT, which increased investment costs.

When funds were incorporated outside the UAE but managed locally, the potential zero-rating benefit was also unavailable. This extra cost was often passed down to investors, making fund management more expensive for both institutional and retail clients.

With VAT exemption now applying to funds incorporated in the UAE, fund managers can offer services without VAT, creating a more competitive environment. This is especially beneficial for institutional investors managing large capital pools, as they are highly sensitive to cost considerations. By focusing on UAE-incorporated funds, the government is encouraging local fund establishment, strengthening the domestic financial market.

Why limit exemption to UAE-incorporated funds?

Limiting the VAT exemption to funds incorporated in the UAE is a strategic decision. It encourages funds to be established locally, rather than in other tax-friendly jurisdictions.

The UAE’s message is clear: ‘If you want to benefit from our tax relief, you need to incorporate your fund here.’

This focus on local funds boosts the UAE’s financial ecosystem. By incentivizing fund managers to set up within the country, the UAE ensures that capital, talent, and support services stay within its borders. This aligns with the broader goals of economic diversification and creating a robust local financial market.

The UAE aims to be a place where funds are both managed and created, with capital flows contributing directly to the country’s growth.

Competitive advantage

From a global tax perspective, the VAT exemption enhances the UAE’s competitiveness, aligning it with financial centers like Luxembourg, Singapore and the UK, where similar incentives exist – either by way of exemptions or lower rates of VAT/GST or corporate tax.

These regions have long recognized that taxing fund management services can drive investors to more favorable jurisdictions. By implementing this exemption, the UAE remains competitive, attracting both regional and international investors.

Benefits for retail investors

While institutional investors will see immediate benefits, retail investors also stand to gain. Lower fees will make it more affordable for individual investors to access managed funds, opening up more diverse investment opportunities. This is especially important in the UAE, where traditional investments like real estate dominate the market.

Lowering entry barriers for managed funds could broaden participation in financial markets, encouraging more people to invest in stocks, bonds, and other financial products.

Long-term considerations

For this exemption to be effectively implemented, it will be essential for the Federal Tax Authority (FTA) to issue clear VAT guidance. Fund managers and investors need transparency regarding how the exemption will be applied and what qualifies as a ‘UAE-incorporated fund’.

Clarity should also be provided on VAT treatment of related activities (for example, sub-advisory services provided by fund managers). A lack of clarity could lead to compliance issues and undermine the effectiveness of the policy.

UAE corporate tax incentives

Alongside the VAT exemption, the UAE’s corporate tax regime also provides significant benefits for fund managers. Under the new UAE corporate tax law, qualifying investment funds and investment management activities may be exempt from corporate tax (subject to conditions).

This offers further incentives for funds to incorporate locally, positioning the UAE as a highly attractive jurisdiction for global asset management.

From a tax perspective, the UAE’s VAT exemption for fund management services is a forward-thinking decision. By targeting UAE-incorporated funds, the government is driving growth in its local financial sector while staying competitive globally.