Based on the existing VAT legislation, the provision of fund management services in the UAE for a fee is subject to VAT at 5%. It has consequently resulted in an increased compliance cost together with a negative impact on funds’ return on investment.
The key amendments applicable to funds and fund managers include the following:
Article 42(2): The definition of financial services has been expanded to include “The management of investment funds, which means “services provided by the fund manager independently for a consideration, to funds licensed by a competent authority in the State, including but not limited to, management of the fund’s operations, management of investments for or on behalf of the fund, monitoring and improvement of the fund’s performance.”
Article 42(3): Managing investment funds as specified in Article 42(2) is now specifically exempt from VAT, effective from 15 November 2024.
The literal interpretation of Article 42(2)(j) suggests that the exemption only applies if fund management services are provided to “funds licensed by a competent authority in the State”. However, there is no such regime either in the UAE which licenses funds. We understand that while funds are registered in the UAE, the fund managers are licensed to undertake fund management activities. Accordingly, it is our view that the intention of the Article 42(2)(j) is to exempt fund management activities undertaken by fund managers who are licensed with a competent authority in the UAE. This aligns with policy intent to exempt fund management services from VAT aligns with the UAE’s broader goal of establishing itself as a leading global financial hub.
The changes to the VAT treatment of fund management services signals a welcome change in the UAE, creating a more favorable UAE investment environment for international investors and providing UAE funds a competitive advantage when compared to other GCC-based funds. Investors will enjoy an increased return on investments as funds can now allocate any VAT savings (as a result of the exemption) to additional investment opportunities in the region.
In response to the above-mentioned amendments, the key immediate Next Steps for Fund Managers include:
- Revise VAT treatment: Fund managers must revise their VAT treatment on fund management services. This includes determining the appropriate transition process for the application of the exemption, covering calculation, reporting, and documentation, effective from 15 November 2024.
- Review registration obligations: Assess the need to review and possibly update VAT registration obligations in light of the new exemption.
- Prepare for deregistration and audit: Fund managers should prepare for potential VAT deregistration and ensure readiness for any tax audits that may arise due to the change in VAT treatment and request for deregistration.
- Business forecast impact: Evaluate the impact of the VAT exemption on business forecasts, as the exemption may lead to increased costs of doing business for the fund managers.
- Fund management fee pricing adjustment: Fund managers to consider whether its existing fund management fees agreed may be adjusted due to the change in VAT treatment and associated VAT leakage incurred.
- Financial performance considerations: Consider how the exemption will affect the financial performance of the funds managed.
- Communication to funds and investors: Consider communicating the change in VAT treatment to investors and how it impacts the expected fund performance and investment returns.
Fund managers are advised to take these steps promptly to ensure compliance with the new regulations.
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To speak with us in relation to any of the proposed changes to UAE VAT, or any tax matters or issues more generally, please contact one of the team members below.
