UAE Corporate Tax: What putting funds in qualifying investment funds mean for investors

Investment funds, in its varied forms, provide an unparalleled opportunity to individuals and companies to pool their funds for investment purposes. The UAE is committed to provide an attractive investment environment and maintain its status as a leading investment hub.

Additional tax reliefs, introduced from January 1, 2025, should be alluring for family offices and investors in selecting UAE as their preferred choice to set up investment funds.

The qualified investment funds (QIFs) were until now treated as ‘tax-transparent’, i.e., their profits could still be taxed in the hands of investors based on their respective taxability status.

In a significant relief, investors will not be henceforth taxed – from financial year 2025 onwards - on the income derived from a QIF. The tax relief should also reduce administrative and investor reporting required to determine investors’ proportionate income for tax purposes.

However, the tax relief is conditional upon meeting the ‘diversity of ownership’ condition and the ‘real estate asset investment’ threshold.

The ‘diversity of ownership’ condition requires that no single investor and related parties should own 30%/50%, or hold control, of the QIF.

It essentially prevents a QIF being misused by a person, through relatives and/or controlled companies, to avoid corporate tax. Flexibility is provided to comply with this condition during the setting up and liquidation stage. A grace period of 90 days has been provided should the ‘diversity of ownership’ condition is breached in any year.

It has also been ensured that any breaches to these requirements impact only such investors who are responsible for the breach and do not disqualify the overall fund as a QIF.

The ‘real estate asset investment’ threshold requires that the immovable property investment should be limited to 10% of a QIF’s total asset value.

A breach in the threshold will result in 80% of the pro-rated immovable property income be taxed in the hands of the juridical investors (i.e. other than individual investors). Certain tax reliefs could be claimed by an investor at the time of exit from the QIF corresponding to its undistributed income.

Juridical investors in a REIT, hitherto taxable, will now be subject to tax only on 80% of the real estate income derived through the REIT. Similar to QIF, tax relief can be claimed at the time of exit from REIT in certain scenarios.

Non-resident juridical investors cover those incorporated or otherwise established/recognised under a foreign legislation - such as foreign companies. Such investors were until now taxed on income from any immovable property in UAE, considered as a taxable ‘nexus’.

The ‘nexus’ now includes prorated income from QIF if the ‘diversity of ownership’ condition is not met and/or the ‘real estate asset investment’ threshold is exceeded.

It also includes pro-rated income from REIT. The non-resident juridical investors should ensure the timely compliance of the tax registration and consequential obligations.

The taxability of non-resident investors of QIFs only in limited scenarios is being seen as a relief and a step towards tax certainty.

A new tax regime, called Qualifying Limited Partnership (QLP), has also been introduced to provide the tax-transparency status to incorporated/juridical partnership created solely for collective investment.

A QLP should not earn income from immovable properties in UAE. The tax transparency provides a tax relief to the non-resident juridical investors investing through such QLPs.

The changes in the taxation framework of qualifying investment funds are a welcome step. Though additional clarities on the framework are expected over time, the certainty provided to the investors in funds should establish UAE as a leading investment hub and promote economic growth.