Establishing Qualifying Investment Fund Criteria
In defining the requirements for Qualifying Investment Funds under the Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses, the UAE Ministry of Finance (MoF) has made a substantial advancement. Additional requirements are introduced by Cabinet Decision No. (81) of 2023 for investment funds to qualify as Qualifying Investment Funds and be free from corporate tax. This decision aims to maintain the integrity of the corporate tax system and strengthen the UAE’s standing as a significant hub for foreign investment.
The New Cabinet Decision for Qualifying Investment Funds
Real Estate Investment Trusts (REITs) are the only type of investment funds that are not subject to the special requirements set forth by Investment Trusts in order to qualify for corporate tax exemption. Among these prerequisites are:
1. in Investment Activities: Qualifying Investment Funds must be principally engaged in business activities related to investments, with secondary or incidental ventures producing income that does not surpass five percent of their annual gross revenue.
2. Ownership Share Limits: Depending on the number of investors participating, the ownership interests in the investment fund that are held by a single investor and its connected parties may not exceed 30 or 50 percent.
3. Professional Management: An investment manager who employs three or more investment experts is required to oversee investment funds.
4. Investor Control: Investors shouldn’t have any say in how the fund is run on a daily basis.
Flexibility in Investment Funds Other Than REITs
For the first two fiscal years following their creation, non-REIT investment funds will be given a grace period; however, they will need to show proof that they have complied with various ownership requirements. The objective of this policy is to improve the Corporate Tax framework’s adaptability and practicality for taxpayers. This flexibility is contingent on a well-demonstrated commitment to diversify ownership beyond the first two fiscal years, though.
Exemption Conditions for REITs
In the case of REITs, the exemption requirements include the requirement that the value of the real estate assets—apart from land owned by the REIT—must surpass AED 100 million. In addition, at least 20% of the capital must be publicly traded or held by more than two institutional investors, and the company must maintain an average yearly real estate asset percentage of 70%.
The Ministry of Finance emphasizes that great care has been taken to ensure clarity and ease of application in the recently imposed extra conditions, as stated in Cabinet Decision No. (81) of 2023. These requirements will preserve the integrity of the corporate tax system while also greatly enhancing the UAE’s reputation as a top investment destination. This choice is consistent with the UAE’s steadfast commitment to fostering an investment-friendly climate, ensuring its long-term competitiveness in the international market.