What are Investment Funds and the Investment Manager as per UAE CT law?

Investment Funds and Investment Managers

Investment funds can be referred to as an entity or group of entities that maintain a pool of funds collected by the potential investors and aim to invest such funds. These investment funds can have a corporate structure similar to a business entity like a joint liability company, limited liability partnership company, limited liability company, public or private joint stock company, etc. The investment fund entities are also enabled to adopt the unincorporated partnership structure or investment trusts.

The investors in the investment funds have the objective of earning maximum return on the investments made, which are either in the form of capital or the assets. The role of investment funds may include collecting the pool of funds and making the investments in potential businesses, operating any business activities, and generating satisfactory profits and returns.

Investment managers are the persons who are appointed by the investment funds in order to make the decisions regarding the investments from the investment fund’s behalf as per the agreement and the investment policy. The investment manager earns the consideration in the form of management fees for the activities conducted by him or her.

The CT Law and the Investment Funds

The corporate tax regime focuses on providing a level playing field for all types of investors, whether they be direct investors or indirect investors. The UAE Corporate Tax law ensures the neutral treatment of the investors by treating the investors of the investment funds similarly as if they invested directly.

Under the CT regime, the investment funds based on the unincorporated partnership structure are eligible to be treated as transparent under the CT law, whereas the investment funds that are not unincorporated partnerships will be treated as qualifying investment funds, thereby exempting them from the corporate tax, hence securing the investment fund from payment of CT and transferring the tax liability to the ultimate investors.

Corporate Tax Impact on Investment Funds

The implementation of CT law on the investment funds will depend on the business structure adopted by the investment funds. The treatment of the investment fund based on the structure includes the following:

Investment Funds that are Resident Persons

For the investment fund entities that are structured as a resident person, under the CT regime and in line with the regulations, will be subject to the CT in the UAE.

If the investment funds meet the certain criteria related to the qualifying investment fund, then the entity can opt for the exemption from the CT liability. However, the exemption can only be opted for after being registered under the FTA as a taxable entity.

The investment funds, upon getting the approval for the qualifying investment fund, will be exempt from the CT and will not be liable for the CT. On the other hand, the investors, being the taxable persons, will have their proportion of net income from the investment funds treated as per Article 20 of CT law.

Investment Funds that are Unincorporated Partnerships

The investment funds based as unincorporated partnerships as per the CT regime are considered to be transparent for the CT purposes; on the other hand, it will not be considered as a taxable person under the law. Any income earned by such an unincorporated partnership will be treated as the income earned by the investors under the CT procedures.

For the investors of the unincorporated partnership, they can apply to the FTA in order to treat the unincorporated partnership as a separate taxable person, whereby the investors can:

• Avoid including the expenditures and income of the unincorporated partnerships in their own income until and unless the unincorporated partnership opts for qualifying investment funds.
• The unincorporated partnership, as a taxable person, can opt for qualifying investment funds upon meeting the required criteria.

Investment funds that are non-residents

The investment fund entity, which is non-resident as per the CT law, will be subjected to CT if it:

• Has any permanent establishment in UAE: CT will be implied on the income earned from such a permanent establishment.
• Has any state-sourced income: The income would be charged with withholding tax, currently at 0%.
• Has any nexus in UAE as per the Cabinet Decision No.56 of 2023

Corporate Tax Impact on Investment Managers

The investment manager is entitled to earn a fee on the services provided by him or her, such as investment management services, brokerage services, etc. If the investment manager is a resident person, then the fee earned will be taxable under the CT law. On the other hand, if the fee is earned from any qualifying investment fund, then it is to be included in the taxable income of the investment manager in line with the income from the other business activities.

If the investment manager is a non-resident person, then certain criteria are to be met in order to determine the CT implementation. If the investment manager has any permanent establishment in the UAE, then the fee earned will be subject to CT, subject to the attributability of such fee to the establishment. The state-sourced income of the manager will be subject to the withholding tax, which is 0% currently.

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