Taxation of Investors of a Qualifying Investment Funds in the UAE

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The FTA has recently issued guidelines on Investment Funds and Investment Managers. This article delves into the intricacies of the UAE Corporate Tax Law (CT Law) applicable to resident and on-resident investors in a Qualifying Investment Funds (QIFs). 

Inclusion of QIFs’ Income 

Investors classified as Taxable Persons in QIFs must include their proportionate share of the QIF’s net income in their Taxable Income. If the investor is an Exempt Person in the UAE, income from QIFs will not be taxed.  

Besides, taxation is also based on the residential status of the Taxable Person as discussed below:

1.For a Resident Juridical Person investors, any net income available for distribution, that is not Exempt Income, is treated as Taxable Income.

2.Resident Natural Person investors will be taxed on income from QIFs if the investment is part of a business or business activity conducted by the individual. Thus, if a UAE resident natural person invests personal savings in QIFs to earn investment income, such income is treated as personal investment income and not taxed in the UAE.

3.For a Non-Resident Person, any net income that is not Exempt Income, will be taken into account if it is attributable to its Permanent Establishment (PE) in the UAE.

Allocation of Income 

At the Fund Level:

In QIFs, the allocation of income is crucial for tax considerations and transparency. The net income available for distribution is divided into distinct categories as depicted below.

At the Investor Level (Taxable Persons):

Taxable Persons must report their proportionate share of net income from QIFs as their Taxable Income. The income categorization applicable to the QIFs also applies to the investors, i.e., income considered as interest income for the QIF will be considered as interest income for the investors too and taxed accordingly. 

Taxation of income at investor level also depends on factors like their residential status. For instance, interest income from the QIF is taxable for a Resident Juridical Person investor while it is not considered as income for a Non-resident Juridical Person investor that does not have a PE in the UAE. 

Further, investors may be entitled to certain tax benefits on such income from QIFs, viz. 

• a deduction of net interest expenditure up to AED 12 million; 
• an exemption on capital gains from disposal of ownership interests in QIFs subject to specific conditions; 
• a benefit under tax treaties where income from investments in QIFs may not be taxed for the investors or may be entitled to relief from double taxation. 

Conclusion

Attribution of income to investors in a QIF generally requires an adjustment where the tax year followed by QIFs and the investors is different or investment is made during the course of the year. Besides, claiming benefits under the tax treaties can often lead to double non-taxation, thus inviting ire of tax authorities. 

Despite these issues which are prevalent in other countries too, the guidelines serve as an important roadmap on taxation of income of investors in a QIFs.

Related Article:

Taxation of Investment Funds and Investment Managers in the UAE

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