An investment fund is a financial instrument that pools money from multiple investors to build a diversified portfolio of assets such as stocks, bonds, real estate, and commodities. By investing in a fund, your capital is amalgamated with that of other investors, and a fund manager is tasked with the responsibility of buying, managing, and selling these investments on behalf of the investors.
UAE investment funds are divided into public funds, which are accessible to the general public, and private funds, which are exclusively offered to professional investors. These funds can be either open-ended, with variable capital, or closed-ended, with fixed capital. Various stakeholders are involved in investment funds, including investors, trustees, investment managers, and sub-advisors.
Tax-registered investment funds that seek corporate tax exemption from the Federal Tax Authority (FTA) and receive approval are termed as qualifying investment funds (QIF). Only juridical investment funds qualify for this exemption, as the income of natural person investment funds, such as unincorporated partnerships, is already exempt at the fund level.
The FTA approves investment funds as QIFs if the fund or its manager is regulated by a competent authority, if the fund interests are traded on a recognized stock exchange or widely marketed, and if the fund's primary purpose is not to evade corporate tax. Additionally, UAE Cabinet Decision No. 81 of 2023 states that, excluding REITs, the primary business of the investment fund involves investment activities. If there are ten or fewer investors, no single investor or related parties can hold more than 30% of the portfolio. For more than ten investors, no single investor or related parties can hold more than 50% of the portfolio. The fund must be managed by an investment manager with at least three professionals, and investors should not control the daily management of the fund.
QIFs are exempt from corporate tax because the investors are treated similarly to direct investors in the underlying assets. This structure ensures that taxation occurs only at the investor level, proportionally. The QIF distributes net income across four categories: exempt income, interest income, income from UAE immovable property, and other income.
Exempt income includes dividends from resident juridical persons (excluding exempt persons) and income from participating interests under certain conditions. Interest income refers to amounts accrued or paid for the use of money or credit. Income from immovable property includes net income from UAE property. Other income includes net income not falling into the other categories.
The QIF is exempt from corporate tax, and its net income is generally taxable for investors under general tax rules. Individual investors are not taxed, while juridical persons have varying tax treatments based on the type of income. The investment manager earns income through brokerage and management fees, which are taxed in the usual course of business.
To qualify as a QIF, conditions must be continuously met throughout the tax period. The QIF must submit an annual declaration to the FTA within nine months after the tax period, confirming compliance. As an exempt entity, the QIF cannot be part of a tax group or qualifying group and cannot transfer losses or benefit from tax reliefs.
The writer, Mahar Afzal, is a managing partner at Kress Cooper Management Consultants. This article reflects the writer's opinion and not necessarily that of Khaleej Times. For inquiries or clarifications, contact him at mahar@kresscooper.com.
