On the 6th of May 2024, the UAE Corporate Tax ("CT") Guide for Investment Funds and Investment Managers (the "Guide") was published. The Guide provides further information around:
- Conditions for a Qualifying Investment Fund ("QIF") to be exempt from CT;
- Conditions for a Real Estate Investment Trust ("REIT") to be exempt from CT;
- Tax implications for an investor investing in a QIF;
- Conditions for a foreign person to benefit from the Investment Manager Permanent Establishment ("PE") exemption; and
- Relevant CT compliance requirements for the above.
In general: QIFs (including qualifying REITs) (that are not structured as tax transparent Unincorporated Partnerships) may be exempt from CT, provided certain conditions are met. This exemption seeks to foster neutrality between direct investments and investments through collective investment vehicles by not subjecting the income of QIFs to taxation or unnecessary compliance obligations. Instead, each investor in QIFs will include their proportional part of the QIFs net income available for distribution (as reflected in the financial statements of the QIF) in their own income statement, provided the investor is a Taxable Person.
This communication does not provide a full overview of the CT rules applicable to investment funds and investment managers. However, we wanted to share with you some of our own observations and key takeaways from the Guide. Our key takeaways, grouped by topic, are as follows.
1. Allocation of income
QIFs (including qualifying REITs) shall allocate the amount reflected as net income available for distribution in their financial statements as Exempt Income, Interest Income, Income from Immovable Property, and Other Income.
Exempt income includes dividend income from UAE Resident Persons, as well as dividends from a Participating Interest in foreign juridical persons, capital gains, foreign exchange gains or losses and impairment gains or losses in relation to a Participating Interest which meets the Participation Exemption conditions.
Each of these different categories shall then be included in the investor's income, according to their proportional share in the QIF. The investors will then be subject to UAE CT depending on whether they are UAE Resident Persons or Non-Resident Persons (in cases where the Non-Resident Person has UAE sourced income, a UAE PE or UAE nexus).
It is worth noting that net income from Immovable Property in the UAE can create a UAE nexus for an investor that is a Non-Resident juridical person, therefore bringing the Non-Resident investor within the scope of UAE CT.
2. Time apportionment of income
The net income and expenditure for a particular financial year of the QIF (including a qualifying REIT) will be the amount reflected in the financial statements of the QIF as at its year end. If the financial year of the QIF differs from the Tax Period of an investor, the investor must include the net income available for distribution in the Tax Period in which the year end of the QIF occurs.
3. Application of other CT provisions
QIFs (including qualifying REITs) that are exempt from UAE CT cannot form part of a Qualifying Group (for the purposes of the Qualifying Group Relief), are not entitled to benefit from the Business Restructuring Relief, are not entitled to benefit from the provisions for the transfer of Tax Losses and cannot form part of a UAE CT Tax Group.
4. Conditions for being a QIF
The Guide further clarifies some of the conditions listed in the UAE CT Law and Cabinet Decision no. 81/2023. One of the main clarifications it provides is that the "Fund Ownership Condition", more specifically the requirement for the investment fund to be marketed and made available sufficiently widely to investors, should generally be met when the "Diversity of Ownership Condition" 1 is met. Further, the assessment of whether the "Diversity of Ownership Condition" is met is determined by reference to an investment fund's direct investors after looking through any investor that is either a QIF or tax transparent for UAE CT purposes.
5. Conditions for being a REIT
The Guide further clarifies some of the conditions listed in the UAE CT Law and Cabinet Decision no. 81/2023. One of the main clarifications it provides is that the threshold of 70% with respect to the "REIT Real Estate Percentage Condition" 2 should be computed based on the average position of the investment fund throughout the year, considering the average of the quarterly closing balances. Further, real estate assets held by Special Purpose Vehicles ("SPVs") of the REIT that are Exempt Persons due to being wholly owned and controlled by an Exempt Person (i.e., the REIT) 3 can be taken into account for the purpose of this test, and for the "REIT Minimum Real Estate Asset Value Condition" 4.
6. QIF and REIT registration
An investment fund should apply for the UAE CT exemption after it has been registered with the Federal Tax Authority ("FTA") and obtained a Tax Registration Number ("TRN"). If it meets the relevant QIF (or REIT conditions, where applicable), it may make an application to the FTA, specifying for which Tax Period the QIF intends to be an Exempt Person. The FTA will then notify the QIF of its decision.
7. Transfer Pricing ("TP") requirements for investment managers
The Guide clarifies that for the investment manager exemption to apply, all investment management and brokerage fees received from non-resident persons should be performed on an arm's length basis. This reemphasizes the UAE TP rules that all related party transactions with resident and non-resident persons are required to be performed on an arm's length basis. This is also a mandatory requirement for UAE free zone persons to qualify for the preferential tax regime.
The guide goes onto make specific points on how to apply the transfer pricing rules. For example, if a fund contracts with an investment manager to perform the investment management activities, and the investment management fees is charged to third party investors the investment management fee paid by the fund to the investment manager is inherently at arm's length. (This is also useful guidance for the application of transfer pricing rules to other industries where there is a direct link with third parties). The guide also discusses other examples such as third parties and related parties charging a similar fee structure, co-investments, and carry fees received by the investment manager which should also be considered arm's length in nature.
While the guide focusses on the income the investment manager should receive, sub-contracted services should also be assessed from a transfer pricing perspective. For example, if the investment manager sub-contracts other related parties to perform key functions on their behalf (i.e., investment management activities, research / analytics, and capital raising functions) a robust transfer pricing study should be performed to determine the arm's length remuneration for the related parties.
The guide further clarifies that if in prior years it is found that a non-arm's length fee was received by the investment managers, a "true-up" adjustment may be applied to ensure consistency with the arm's length standards.
Finally, all the above analysis should be documented from a UAE TP perspective within the Local File on a contemporaneous basis and maintained on file.
Footnotes
1. The "Diversity Ownership Condition" requires that no single investor (together with its related parties) owns: (1) 30% or more of the ownership interests, if there are 10 or fewer investors in the investment fund; or (2) 50% or more of the ownership interests, if there are more than 10 investors in the investment fund.
2. The "REIT Real Estate Percentage Condition" requires that the REIT has an average Real Estate Asset Percentage of at least 70% during the relevant Gregorian calendar year, or the relevant twelve-month period for which the financial statements are prepared.
3. Article 4(1)(h) of the UAE CT Law.
4. The "REIT Minimum Real Estate Asset Value Condition" requires that the value of real estate assets, excluding land, under the management or ownership of the REIT exceeds AED 100 million.
Originally Published 20 May 2024
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.