Investment Funds in the UAE: Investor Lessons

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UAE has become  world’s favourite when it comes to investments.

In a vibrant region such as UAE, there was a group of 15 people who decided to combine their funds together to invest in various ventures and they formed a Qualifying Investment Fund (QIF). Why QIF? Because it was exempt from corporate tax, which meant more returns for the investors.

The QIF had a net income of AED 100 million, allocated into four categories: 

• Exempt Income (AED 30 million), 
• Interest income (AED 20 million), 
• Income from Immovable Property in the UAE (AED 30 million), and 
• Other income (AED 20 million).

All the investors came from different walks of life and had varied investment preferences. 

• Thirteen of them were individuals who invested their personal savings, collectively owning 20% of the QIF. These individuals were not subject to corporate tax on their income from the QIF, as it was considered personal investment income.
•  The remaining two investors were companies. 
  • One company, based in the UAE, owned 40% of the QIF. This company, being a resident person, had to include its share of the QIF's net income in its taxable income, except for the exempt income portion. 
  • The other company was a foreign company with no presence in the UAE, also owning 40% of the QIF. This company, being a non-resident person, was only subject to tax on its share of the income from immovable property in the UAE.

All the investors were quite satisfied with the performance of QIF and decided to expand and explore other investment avenues. UAE is known for its skyscrapers and big towers. Quite common that they came across a Real Estate Investment Trust (REIT), which is another type of QIF focusing only on real estate investments. Eventually they formed a REIT and started investing in real estate properties across the UAE. The REIT had a net income of AED 70 million, allocated into two categories:

• Net Interest income (AED 10 million) and,
• Net income from Immovable Property in the UAE (AED 60 million).

Interestingly, the tax treatment for the REIT slightly differs from the regular type of QIF. The REIT itself remain exempt from corporate tax, however the income earned by the investors was subject to tax, based on their residency status and the nature of income. The 13 individual investors, being UAE residents and holding their investments as personal investments, were not subject to corporate tax on their income from the REIT as well but there was no exemption for the UAE-based company as it had to include its entire share of the REIT's net income in its taxable income. In case of another investor being a foreign company, they were only taxed on its share of the income from immovable property in the UAE as they had no other presence in the UAE.

The investors continued their investment adventures and learned about one of the important aspects of timing when it came to taxes pertaining to investment funds. One of the investors, who owned a company called "A LLC," acquired a 10% ownership interest in the QIF on May 26, 2025, and sold it on March 14, 2027. The financial year applicable to A LLC's ended on March 31st, while the QIF followed the Jan-Dec as its financial year. A LLC had to include its share of the QIF's net income in its taxable income for the tax periods ending on March 31, 2026, and March 31, 2027, as these periods included the QIF's year-end dates. Even though A LLC sold its ownership interest in March 2027, it still had to include its share of the QIF's net income for the tax period ending on March 31, 2028, because this period also included the QIF's year-end date of December 31, 2027. An important interplay which is to be seen at the time of sale of shares is the participation exemption conditions by which the capital gain would be exempt.

They learned that distributions from the QIF were not taxed as income if the investor had already included the corresponding net income in their taxable income in previous years. For example, in the second year of investment in the QIF,  A LLC received a distribution of AED 5 million, but it had already included AED 6 million (from the first year) and AED 1 million (from the second year) in its income. Therefore, the distribution was not considered taxable income. This was certainly good news for the investors as there would not be any double taxation of the same income.

One fine day, one of the investors, who owned a company called "A LLP," decided to transfer some assets to another company called "B LLC." Generally, this transfer would not be taxed because both companies were part of the same group. However, surprise came when things changed as A LLP converted itself to become a QIF itself. A clawback provision was triggered, and the asset transfer was sought to be taxed by bringing into the tax ambit the gains made from the transfer.

Gradually, the investors also got to know about the importance of the QIF's business activity condition to qualify as a QIF, the fund's main business had to be investment-related, with any other activities being secondary. For instance, X LLP, a QIF, primarily invested in shares of private entities with the intention of selling them later for a profit. In 2024, X LLP successfully sold an investment, generating a revenue of AED 100 million. However, in 2025, it made investments but didn't sell any, resulting in zero revenue. Despite having no revenue in 2025, X LLP could still satisfy the condition if its overall activities and historical data indicated that its main focus remained on investment business. This is to ensure that the QIF was genuinely focused on investments and not using its tax-exempt status for other purposes.

They also gained an understanding that this rule equally applies to feeder funds as well, which were funds that invested in other funds. For example, there was an investment fund called A LLP, managed by B LLC. C LLP, D LLP, and E Co were investment vehicles that held ownership interests in A LLP. The investors in these entities were diverse, including UAE resident individuals, UAE companies, and non-UAE investors. A LLP met the investment business condition because its revenue came entirely from investments in shares listed on a recognized stock exchange. If A LLP became a QIF, its revenue would be considered income for B LLC, C LLP, and D LLP, and since C LLP and D LLP had no other revenue sources, they would also meet the investment business condition. Even if A LLP didn't become a QIF, C LLP and D LLP would still meet the investment business condition because their revenue would come from distributions from A LLP, which were considered investment-related income. As long as the feeder fund's primary business was investment-related, it could also qualify as a QIF.

The investors were fascinated by this world of investment funds and continued to explore different types of funds to generate higher returns. They understood about parallel funds, which were separate funds that followed the same investment strategy but had different investors. For example, A LLP and B LLP were parallel funds with the same investment manager. A LLP was open to a wide range of investors, while B LLP was targeted at a smaller group of investors with specific requirements. The funds' documentation specified that for every investment, A LLP would contribute 80% of the capital and receive 80% of the returns, while B LLP would contribute 20% and receive 20% of the returns. A LLP had over 100 investors, and no single investor owned more than 10% of the fund, while B LLP had 8 investors, with the largest investor owning a 35% stake. The diversity of ownership condition was assessed separately for each parallel fund, and in this case, A LLP met the condition while B LLP did not.

Another learning for them was about the diversity of ownership condition, which required that no single investor could own a majority stake in the fund. For example, in their QIF there was an investment fund X LLP with several investors: A LLC (15% ownership), B LLC (5% ownership, wholly owned subsidiary of A LLC), C LLC (20% ownership, controlled by A LLC with a 25% ownership interest), and 8 other investors (7.5% ownership each). To determine the number of investors, all 11 investors were considered. However, A LLC, B LLC, and C LLC were related parties, so they were counted as one investor, bringing the total number of investors down to 9. The diversity of ownership condition was met if no single investor owned 30% or more of the fund (since there were fewer than 10 investors). In this case, no direct investor owned 30% or more. To assess indirect ownership, they aggregated the ownership interests held by A LLC and its related parties, which totalled 25%, less than 30%. Therefore, the diversity of ownership condition was still met for X LLP. This ensured that the fund was not controlled by a few individuals and that the interests of all investors were protected.

Their final lesson came in the form of the "arm's length" condition, which applied to investment managers. This condition ensured that transactions between the investment manager and the fund were conducted fairly, as if they were unrelated parties. This prevented conflicts of interest and protected the interests of the fund's investors.

Through their above experiences, all the investors not only achieved their investment objectives but also gained a comprehensive understanding of the tax implications associated with various investment funds in the UAE. While these funds offered tremendous growth potential, navigating through the tax implications landscape becomes essential for making informed decisions.