UAE corporate tax: Are investment and real estate funds exempt?

If an investment vehicle is found to be used solely for tax avoidance, its exemption may be revoked

Given the significant role of real estate in the economy, Reits face additional compliance requirements. Pawan Singh / The National
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Every profession has its own distinct lexicon, or language, which mitigates any potential misunderstandings.

Furthermore, it serves as a barrier to entry and maintains remuneration in line with the level of difficulty inherent in onboarding.

Corporate tax exemplifies such a community. Today, we are going to delve into one of its niche domains: investment funds and their respective managers.

The UAE Federal Tax Authority recently released another detailed guide, which, while not legally binding, aims to assist individuals in understanding and navigating the evolving legislative framework.

For those individuals or families seeking to optimise the return on their savings, this is an area about which they might be aware. Structured correctly, these investment vehicles can be very tax efficient.

Typically, the management of these vehicles is outsourced due to it not being a primary income-generating activity.

Governments in the western world are increasing taxes and closing tax loopholes to boost revenues and support their ageing populations.

If you are seeking evidence of the Laffer curve – which highlights the relationship between tax rates and revenue – look no further. As taxes increase in a particular location, tax revenue inevitably begins to decrease as a significant portion of the population relocates to more tax-friendly environments.

As a result, the UAE is becoming an attractive destination for individuals seeking a competitive tax environment. A corporate tax rate of 9 per cent is highly competitive on a global scale.

The country's sunny climate only adds to the appeal.

We start with a group of investors who contribute funds to an investment fund with a specific objective in mind. This may involve restrictions on the types of investments that can be made, as well as predetermined stop-loss levels, divestment targets or time-based parameters.

There are two main structures to consider: Qualifying investment funds and real estate investment trusts, commonly referred to by their acronyms – QIF and Reits. These entities may qualify for exemption from corporate tax if they consistently adhere to a well-defined regulatory framework.

This framework includes oversight by either the relevant UAE regulatory body or an internationally recognised equivalent, which the country acknowledges as capable of fulfilling the regulatory role.

If an investment vehicle is found to be used solely for tax avoidance, its tax exemption may be revoked. This is a standard precautionary measure.

Regulatory authorities in the UAE are committed to enhancing this sector of the economy. Their goal is to establish a fair and equitable environment, ensuring that the tax treatment of such funds aligns with that of individual direct investments in the underlying assets.

Given the significant role of real estate in the economy, Reits face additional compliance requirements. The minimum value of assets held must be at least Dh100 million ($27.2 million). Ownership of the assets is not mandatory; rather, the management of them is key.

Assets can be held in a special purpose vehicle (SPV), allowing for easier adjustments to a fund's composition. This flexibility streamlines the process of making changes within the fund.

Ownership must be distributed among various parties, with regulations for related parties applying not only to companies but also to individuals.

It is important to note that for individuals, the rules extend up to four degrees of relationship, encompassing relationships such as great-grandfather to grandson and individual to second cousin twice removed.

For many individuals living away from their home countries, the latter may not pose a significant challenge. However, for Emiratis, this presents a unique and crucial issue that requires careful consideration and continuous evaluation.

While a Reit has the flexibility to invest in various asset classes, it is mandatory for real estate to constitute a minimum of 70 per cent of the total fund value.

It is essential to be mindful when reviewing legislation and guidelines, as it can be easy to confuse the income generated from the underlying asset value with the assets themselves.

This is just one example of the need for caution in navigating the real estate market. History has shown us instances of sudden property market corrections, leading to the deflation of bubbles.

In such a rapidly evolving environment, a Reit runs the risk of losing its exempt status inadvertently as the relative values of its components fluctuate.

Thankfully, the regulations allow for flexibility and provide ample time to adjust the overall portfolio.

This provision is in place to prevent a chain reaction of actions that could worsen the situation and lead to an uncontrollable decline.

Those of us who have experienced a cash call can appreciate the importance of this.

On June 1, corporate tax celebrated its first year of being in effect in the UAE. As the single candle was blown out to mark this occasion, we anticipate the numerous laws and explanations that are yet to be unveiled.

David Daly is a partner at the Gulf Tax Accounting Group in the UAE

Updated: June 11, 2024, 4:30 AM