Investment funds, including Real Estate Investment Trusts (REIT), have been provided with additional clarity through the issuance of Cabinet Decision No. 81 of 2023 on Conditions for Qualifying Investment Funds for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (“Decision”) for clarification as to whether they can apply to be exempted from UAE corporate tax (at the discretion of the UAE tax authority). This Decision applies equally to all investment funds, including REITS, regardless of their place of incorporation (i.e., ADGM or DIFC).
The detail in this Decision allows for investments funds, including REITs, to perform an analysis (based on prescribed metrics) to understand if they could be eligible for such an exemption. If based on the analysis these conditions are satisfied, there remains a requirement to make an application and receive approval from the UAE tax authority that such conditions have been satisfied.
Where the approval is granted, an investment fund (including a REIT) is still required to register for UAE corporate tax and to make an annual corporate tax filing, although its income streams should not be subject to UAE corporate tax (such obligation would pass through to the investors).
In more detail
Conditions to exempt an investment fund from corporate tax
Article 10(1) of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (“CT Law“) states that an investment fund may apply to the Federal Tax Authority ("FTA") to be exempt from corporate tax as a Qualifying Investment Fund provided that:
- The investment fund or the investment fund’s manager is subject to the regulatory oversight of a competent authority in the UAE, or a foreign competent authority recognized for the purposes of Article 10 of the CT Law.
- Interests in the investment fund are traded on a stock exchange established in the UAE that is licensed and regulated by the relevant authority, or any stock exchange established outside the UAE of equal standing (“Recognized Stock Exchange”), or are marketed and made available sufficiently and widely to investors.
- The main or principal purpose of the investment fund is not to avoid corporate tax.
To provide further detail on the interpretation of Article 10 of the CT Law, the Decision sets out additional conditions that determine the ability of an investment fund (noting that there are separate conditions for a REIT), to apply for exemption from corporate tax as a Qualifying Investment Fund:
- The main Business or Business Activities conducted by the investment fund are Investment Business activities. This is being defined as the issuing of investment interests to raise funds or pool investor funds or establish a joint investment fund with the aim of enabling the holder of such an investment interest to benefit from the profits or gains resulting from the entities acquisition, holding, management or disposal of investments, while any other Business or Business Activities conducted by the investment fund are ancillary or incidental activities not exceeding 5% of its total annual revenue;
- The share of ownership interests in the investment fund held by a single investor and its Related Parties should not exceed more than*:
|Percentage of the ownership interests in the
|Number of investors:
|Less than ten (10)
|Ten (10) or more
* Note: This condition does not apply in the first two financial years of the investment fund, provided that there is sufficient evidence to demonstrate the intention of the investors to satisfy this condition after this period.
- The investment fund must be managed or advised by an Investment Manager employing a minimum of three (3) investment professionals.
- The investors shall not have control over the day-to-day management of the investment fund.
Conditions to exempt a REIT from corporate tax
A REIT may apply to the Federal Tax Authority to be exempt from Corporate Tax (under Article 10(1) of the CT Law) as a Qualifying Investment Fund provided that:
- The value of real estate assets, excluding land, under the management or ownership of the REIT exceeds AED 100,000,000.
- At least 20% of the share capital of the REIT is:
- Listed on a Recognized Stock Exchange or
- Directly wholly owned by two (2) or more institutional investors (which is defined to include amongst others the government entities, banks, pension or social funds), provided that at least two (2) of those institutional investors are not Related Parties
- An average Real Estate Asset Percentage of the REIT amounts to at least 70% during:
- The relevant Gregorian calendar year or
- The relevant 12-month period for which the financial statements are prepared.
To speak to us in relation to the new Decision, tax or funds issues generally, please reach out to one of the Baker McKenzie contacts above.
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