The recently published Cabinet Decision No. 81 of 2023 introduces new conditions for Qualifying Investment Funds (“QIF”) that must be fulfilled to qualify for the CT exemption (aside from the ones under the CT law).
The conditions are as follows:
Other important considerations are that, as per Article 2(3), the ownership interest ratios mentioned above are not mandatory to be met in the Fund’s initial 2 financial years. However, evidence of the investors’ intention to meet these conditions after the first 2 financial years is necessary. If the ownership interest requirements are not fulfilled, the Fund will lose its exempt status from the beginning of the 3rd financial year, and it may not be able to regain this status afterwards.
This provision allows for a buildup in the financial track record for new QIFs. It also means that privately owned funds will be unable to claim a tax exemption. Even funds which are partially privately held may not qualify.
The Decisions also specify exemption conditions for a Real Estate Investment Trust (REIT) as follows (Article 3):
In the UK, at least 35% of the units should be freely available. In the US, the beneficial ownership of the REIT must be held by at least 100 persons. In Singapore, a listing is required in order to benefit from the tax exemption. Note that we have simplified the conditions.
In the UK, US and Singapore, this percentage is 75% (nuances apply). In other jurisdictions, sometimes certain provisions exist around related party transactions (e.g. loans from related parties, investments in related parties’ assets, …). So far, there are no such requirements in the UAE.
We note that the REIT does not have a minimum distribution requirement, contrary to the UK, US and Singapore, which all require that 90% of income is distributed (again, nuances apply).
Moreover, there is no potential initial build-up period or grace period for the Fund or REIT to establish a track record while it is privately held to subsequently list. The UK does provide such a grace period for up to three years. The only way for a REIT to enjoy a similar treatment is if it is first held by institutional investors and then marketed further.
In addition to the mentioned provisions, the Decision further specifies the treatment of Investors’ Income (and related nonresident Investment Manager) and unincorporated partnerships and offers guidance on what constitutes an Institutional Investor. Notably, it states that a non-transparent unincorporated partnership can qualify for the QIF exemption.