UAE Taxation Regime for Investment Funds and Investment Fund Managers

In the United Arab Emirates (UAE), companies engaged in investment funds and investment management are regulated by one of three authorities: the Securities and Commodities Authority (SCA), the Dubai Financial Services Authority (DFSA), or the Financial Services Regulatory Authority (FSRA). The appropriate regulator is determined by the location in which the companies or businesses are registered.

Federal taxation was first introduced in the UAE in 2017 with the Excise Tax, followed by the implementation of the Value Added Tax (VAT) on 1 January 2018. Subsequently, as of June 2023, the Corporate Tax (CT) was also introduced. The UAE federal tax laws are structured to include a primary tax law, Executive Regulations (ER) to the main law, and various decisions issued by the Federal Tax Authority (FTA), the Ministry of Finance (MoF) and the UAE Cabinet, related to the primary legislation. The VAT ER in the UAE have seen multiple amendments since their introduction in 2018. The most recent update, in October 2024, clarified the VAT exemption for supplies related to investment fund management (IFM) services. Additionally, on the CT front, certain investment funds (IF) and related IFM services may be eligible for certain exemptions. This article provides a concise overview of the economic and statutory compliance aspects of these special tax regimes in the UAE.

The supply of financial services is generally considered exempt from VAT unless provided for an explicit fee or similar consideration. Financial services supplied by IF typically do not involve such fees, meaning such supply could be exempt and any related input VAT becomes a business expense. Additionally, exempt supplies are also excluded from the VAT threshold calculation for both voluntary and mandatory VAT registration. Consequently, if a business' primary supply consists of exempt services, and the taxable portion does not meet the registration threshold, the business will be unable to register for VAT and recover input VAT. In practice, IFM services are often remunerated through explicit fees such as fixed management fees and performance fees which are calculated as a certain percentage of the fund income. Therefore, these IFM services could be subject to VAT. However, under the latest VAT ER, IFM services may now be treated as exempt if provided to funds licensed by a competent authority in the UAE. As a result, businesses offering these services must reassess their ability to recover input VAT and reconsider their eligibility for VAT registration or assess the need for deregistration.

While the new VAT ER focuses on IFM, the CT laws are primarily focused on IF. Certain IF may apply to be treated as an exempt person (EP), meaning their income is not subject to tax. These entities are referred to as Qualifying Investment Funds (QIFs). According to FTA guidelines, the QIF exemption aims to prevent double taxation at the level of investors, the investment manager, and the QIF itself. The UAE CT law outlines three primary conditions for an IF to qualify as a QIF: first, the IF or its IF-manager (IFMR) must be regulated either in the UAE or a foreign country; second, the IF's interests must be traded on a recognized stock exchange or marketed widely to investors; third, the IF's primary purpose must not be tax avoidance. Further, a Cabinet Decision divides IF into Real Estate Investment Trusts (REITs) and non-REITs, with non-REIT funds subject to conditions concerning investment business, independence and disclosure requirements. REITs, on the other hand, must meet specific criteria related to minimum real estate value, ownership, and real estate percentage.

In addition to QIF, recent updates to the UAE CT regime introduced a new exempt category known as Qualifying Limited Partnership (QLP). While not classified as investment funds by default, QLPs may also benefit from CT exemption provided they are established solely for the purpose of collective investment, do not engage in UAE immovable property activities, and were not formed for tax avoidance purposes. The QLP regime is particularly relevant to a limited partnership that is a juridical person that operates similarly to investment funds, offering an alternative route to exemption for partnerships that do not meet all QIF conditions. Supporting holding or ancillary entities owned by a QLP may also qualify for exemption if their activities are limited and incidental to the QLP’s investment business.

Having said the above, IFMRs do not qualify for exemption under UAE CT law. However, an IFMR operating within a UAE free zone may be eligible for Qualifying Free Zone Person (QFZP) status. To maintain the QFZP status, the entity must meet six conditions, including the generating of Qualifying Income (QI) which may be derived from transactions with either Free Zone Persons (FZPs) or non-FZPs. For IFMRs, income derived from non-FZPs must be related to a Qualifying Activity (QA) and must not involve Excluded Activities. Fund management services (FMS) are recognized as one of the QAs. Being a QFZP gives the benefit that the QI will be taxed at 0% and the rest of the taxable income will be taxed at 9%.

From a commercial perspective, providing exempt supplies can reduce a business' VAT compliance obligations but may also affect its ability to recover input VAT. Similarly, being an EP or a QFZP can lower compliance burdens, such as eliminating the need to pay CT. However, certain reliefs under the UAE CT law, such as those for Qualifying Groups, Business Restructuring, and the transfer of Tax Losses will not apply to EPs and QFZPs. For businesses, the decision to apply for EP or maintain QFZP status involves weighing the reduction in compliance obligations against the potential loss of certain tax benefits.

In practical terms, a business cannot register for VAT unless its taxable supplies meet a certain threshold. This increases the likelihood that IFMRs and IFs will not qualify for VAT registration. In contrast, under the CT law, IFs and IFMRs must register before applying for EP status or utilize QFZP benefits respectively. If an IF or IFMR succeeds in registering for VAT, they must report exempt supplies in their VAT returns and perform an annual VAT wash-up exercise. Similarly, under CT law, QIFs must declare that they have met QIF conditions throughout the tax period. Their financial statements must bifurcate income into exempt income, interest income, UAE-sourced immovable property income, and other income to ensure accurate reporting of investors' income in their financial statements. Once an IF achieves QIF status, its income must be reported for CT purposes as part of investor income, akin to a transparent structure. In the case of IFMRs qualifying as QFZPs, they must submit the CT return and pay the CT liability (if any) within nine months from the end of the relevant tax period, while also submitting audited financial statements and maintaining the applicable transfer pricing documentation.

In summary, while the special UAE taxation regimes for IFs and IFMRs provide certain advantages, they can also present economic challenges. Before opting for such regimes, businesses should thoroughly evaluate the economic factors outlined above.

Having said the above, it is also important to consider recent changes to the UAE CT framework, which introduced additional tax rules for multinational enterprise (MNE) groups operating in the country. These rules apply to groups meeting a certain global revenue threshold and aim to ensure a minimum level of taxation on profits earned in low-tax jurisdictions. While IFs and IFMRs are not expected to be directly impacted by these rules—unless consolidated within an MNE group—those that are part of such groups may still be indirectly affected through reporting or tax obligations at the group level. As such, IFs and IFMRs falling within this category may need to consider different exemption and compliance requirements compared to those that are not affected.

At Baker Tilly, we help clients navigate the evolving UAE tax landscape with ease. From understanding VAT exemptions to assessing Corporate Tax benefits such as QIF, QLP, or QFZP status, our team provides practical guidance tailored to each business. We focus on simplifying compliance, optimizing structures, and ensuring that our clients stay aligned with regulatory changes while making the most of available opportunities.