Overview

Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses ('Corporate Tax Law') was issued on 3 October 2022 and was published in Issue #737 of the Official Gazette of the United Arab Emirates ('UAE') on 10 October 2022.

The Corporate Tax Law provides the legislative basis for imposing a federal tax on corporations and Business profits ('Corporate Tax') in the UAE.

The provisions of the Corporate Tax Law apply to Tax Periods commencing on or after 1 June 2023.

Purpose of this guide

This guide is designed to provide general guidance to help persons understand the UAE Corporate Tax treatment for investment funds, investors, and investments with the assistance of Investment Managers. This guide explains some of the terms and conditions in the Corporate Tax Law, and sets out the following:

• An overview of the meaning of Qualifying Investment Fund and Investment Manager,

• Conditions for a Qualifying Investment Fund to be exempt from Corporate Tax,

• Conditions for a Real Estate Investment Trust ('REIT') to be exempt from Corporate Tax,

• Tax implications for an investor investing in a Qualifying Investment Fund,

• Conditions for a foreign person to benefit from the Investment Manager Exemption as specified under Article 15 of the Corporate Tax Law, and

• Relevant Corporate Tax compliance requirements for the above.

Who should read this guide?

Any Person seeking to apply either the exemption for Qualifying Investment Funds or the Investment Manager Exemption. This guide will be useful for investors, financial advisors, tax professionals, and individuals involved in managing or advising investment funds and provides insights into tax implications, exemptions, and regulations relevant to these entities.

How to use this guide

The relevant Articles of the Corporate Tax Law and the implementing decisions are indicated in each section of the guide.

It is recommended that the guide is read in its entirety to provide a complete understanding of the definitions and interactions of the different rules. Further guidance on some of the areas covered in this guide can be found in other topic- specific guides.

In some instances, simple examples are used to illustrate how key elements of the Corporate Tax Law apply to Qualifying Investment Funds and Investment Managers. The examples in the guide:

• Show how these elements operate in isolation and do not show all the possible interactions with other provisions of the Corporate Tax Law that may occur. They do not, and are not intended to, cover the full facts of the hypothetical scenarios used nor all aspects of the Corporate Tax regime, and should not be relied upon for legal or tax advice purposes, and

• Are only meant for providing the readers with general information on the subject matter of this guide. They are exclusively intended to explain the rules related to the subject matter of this guide and do not relate at all to the tax or legal position of any specific juridical or natural persons.

Legislative references

In this guide, the following legislation will be referred to as follows:

• Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, and its amendments, is referred to as the 'Corporate Tax Law',

• Federal Decree-Law No. 50 of 2022 Issuing the Commercial Transactions Law is referred to as 'Commercial Transactions Law',

• Cabinet Decision No. 49 of 2023 on Specifying the Categories of Businesses or Business Activities Conducted by a Resident or Non-Resident Natural Person that are Subject to Corporate Tax is referred to as "Cabinet Decision No. 49 of 2023",

• Cabinet Decision No. 56 of 2023 on Determination of a Non-Resident Person's Nexus in the State for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as "Cabinet Decision No. 56 of 2023",

• Cabinet Decision No. 81 of 2023 on Conditions for Qualifying Investment Funds for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as "Cabinet Decision No. 81 of 2023",

• Ministerial Decision No. 105 of 2023 on the Determination of the Conditions under which a Person may Continue to be Deemed as an Exempt Person, or Cease to be Deemed as an Exempt Person from a Different Date for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as 'Ministerial Decision No. 105 of 2023',

• Ministerial Decision No. 116 of 2023 on the Participation Exemption for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as "Ministerial Decision No. 116 of 2023",

• Ministerial Decision No. 120 of 2023 on the Adjustments Under the Transitional Rules for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as "Ministerial Decision No. 120 of 2023",

• Ministerial Decision No. 126 of 2023 on the General Interest Deduction Limitation Rule for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as "Ministerial Decision No. 126 of 2023",

• Ministerial Decision No. 127 of 2023 on Unincorporated Partnership, Foreign Partnership and Family Foundation for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as "Ministerial Decision No. 127 of 2023",

• Ministerial Decision No. 132 of 2023 on Transfers Within a Qualifying Group for the purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as "Ministerial Decision No. 132 of 2023",

• Ministerial Decision No. 134 of 2023 on the General Rules for Determining Taxable Income for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as "Ministerial Decision No. 134 of 2023",

• Federal Tax Authority Decision No. 7 of 2023 Provisions of Exemption from Corporate Tax for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as "FTA Decision No. 7 of 2023", and

• Federal Tax Authority Decision No. 11 of 2023 Provisions of Exemption from Corporate Tax for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as "FTA Decision No. 11 of 2023".

Status of this guide

This guidance is not a legally binding statement but is intended to provide assistance in understanding the provisions of the Corporate Tax Law. The information provided in this guide should not be interpreted as legal or tax advice. It is not meant to be comprehensive and does not provide a definitive answer in every case. It is based on the legislation as it stands when the guide is published. Each Person's own specific circumstances should be considered.

The Corporate Tax Law, the implementing decisions and the guidance materials referred to in this document will set out the principles and rules that govern the application of the Qualifying Investment Fund and Investment Manager Exemption rules. Nothing in this publication modifies or is intended to modify the requirements of any legislation.

This document is subject to change without notice.

Investment funds landscape in the UAE

Investment funds activity in the UAE reflects the broad range of financial investment products consistent with similar products available in global markets. UAE funds generally include:

• Public funds, which are available to the general public at large.

• Private funds, which are not accessible to the wider public. Private funds are only offered to professional investors.

Investment funds can be open-ended or close-ended. Open-ended investment funds have variable capital that increases according to the new issued units and decreases by the redemption of existing units. Close-ended investment funds have fixed capital whose units are redeemed only on the expiry of the fund, unless the relevant regulatory authority approves an increase of its capital by new subscriptions or reduction of its capital by the existing units redeemed.

In addition, investment funds can be based on specific investment themes, specific underlying asset classes, or specific sectors. Private equity funds, venture capital funds, private credit funds, infrastructure funds, real estate funds, umbrella funds, money market funds, exchange traded funds, funds investing in crypto tokens, feeder funds, real estate investment trusts and debt funds are terms that usually refer to the type of assets the fund invests in the UAE. Hedge funds usually refer to funds with a specific type of trading strategy. Islamic funds usually refer to a joint pool wherein the investors contribute their surplus money for the purpose of its investment to earn halal profits in strict conformity with the precepts of Islamic Sharia.

In the investment fund industry, these and many other terms are used to refer to different types of investment funds. These terms may sometimes have a narrow technical meaning, but sometimes they do not have a fixed meaning and are used loosely. In the context of the Corporate Tax Law, the provisions of the Qualifying Investment Fund exemption and the Investment Manager Exemption are not restricted to a specific investment fund or strategy and can apply to any investment fund, where the relevant conditions are met.

Rationale for exempting Qualifying Investment Funds

Investment funds generally allow investors of various sizes to benefit from investment opportunities that would otherwise only be available for investors with a certain scale, network or expertise, thereby creating a more even playing field for investors, which can stimulate economic growth and development.

The Corporate Tax Law seeks to ensure neutrality such that investors of an investment fund are in a similar Corporate Tax position as if they had invested directly in the underlying assets of the fund. It is internationally common for a tax system to provide for neutrality between direct investments and investment through collective investment vehicles by not subjecting the income of such entities to taxation or burdensome compliance obligations.

In line with this, investment funds that are structured as Unincorporated Partnerships will be treated as transparent for Corporate Tax purposes which generally achieves an outcome similar to one where the ultimate investor had invested directly. For investment funds that are not structured as Unincorporated Partnerships, a similar outcome can be achieved by exempting the investment fund from Corporate Tax as a Qualifying Investment Fund. This will prevent tax at the level of the investment fund and only the investors would be taxed on the investment returns.

In addition, investment funds play a crucial role in providing liquidity to financial markets by pooling funds from multiple investors and investing in a diversified portfolio of assets. A tax exemption can facilitate more efficient capital allocation and trading activities within financial markets, thereby enhancing overall market liquidity. It can also encourage innovation in financial products and services, as investment managers have more flexibility to structure investment vehicles that meet the diverse needs of investors. This can lead to the development of new investment strategies, products, and markets, fostering financial innovation and competitiveness.

Corporate Tax treatment of investment funds

Treatment for investment managers

Investment managers usually earn a fee for the provision of brokerage or investment management services. If an investment manager is a Resident Person, such a fee is within the scope of UAE Corporate Tax. Fees earned from a Qualifying Investment Fund would be included in the investment manager's Taxable Income, similar to any other income from the investment manager's Business Activities.

If the investment manager is a Non-Resident Person, it may also be subject to Corporate Tax if it meets any of the conditions mentioned in Section 4.1.3 above. ^[13] If the investment manager has a Permanent Establishment in the UAE, the fees earned by the investment manager would be subject to Corporate Tax if they can be attributed to the Permanent Establishment. ^[14] If the investment manager receives its income as State Sourced Income, it may be subject to Withholding Tax on the State Sourced Income. However, the current Withholding Tax rate on State Sourced Income is 0%. ^[15]

Overview of Qualifying Investment Fund status

Treatment of investors in a Qualifying Investment Fund

Overview

An investment fund may apply to the FTA to be exempt from Corporate Tax as a Qualifying Investment Fund provided the conditions prescribed in Article 10(1) of the Corporate Tax Law and Cabinet Decision No. 81 of 2023 are met. The conditions set out in Article 10(1) of the Corporate Tax Law are as follows: ^[60]

1. The investment fund or the investment fund's manager is subject to the regulatory oversight of a competent authority in the UAE, or a foreign competent authority recognised for the purposes of Article 10 of the Corporate Tax Law (the 'regulatory oversight condition'),

2. Interests in the investment fund are traded on a Recognised Stock Exchange or are marketed and made available sufficiently widely to investors (the 'fund ownership condition'), and

3. The main or principal purpose of the investment fund is not to avoid Corporate Tax (the 'main purpose condition').

The following additional conditions for investment funds (other than Real Estate Investment Trusts 'REITs') are set out in Cabinet Decision No. 81 of 2023, as follows: ^[61]

• The main Business or Business Activities conducted by the investment fund are Investment Business activities, and any other Business or Business Activities conducted by the investment fund are ancillary or incidental (the 'Investment Business condition'),

• A single investor and its Related Parties do not own:

  1. More than 30% of the ownership interests in the investment fund, where the investment fund has less than ten investors; or

  2. More than 50% of the ownership interests in the investment fund, where the investment fund has ten or more investors (the 'diversity of ownership condition'),

• The investment fund is managed or advised by an Investment Manager that has a minimum of three investment professionals (the 'Investment Manager condition'), and

• The investors shall not have control over the day-to-day management of the investment fund (the 'independence condition').

The above additional conditions do not apply to REITs. Instead, Cabinet Decision No. 81 of 2023 has set out the following additional conditions for REITs. ^[62]These additional conditions are in addition to the conditions under Article 10(1) of the Corporate Tax Law:

• The value of real estate assets, excluding land, under the management or ownership of the REIT exceeds AED 100 million (the 'REIT minimum real estate asset value condition').

• At least 20% of the REIT share capital is floated on a Recognised Stock Exchange, or it is directly wholly owned by two or more institutional investors specified in Article 5 of Cabinet Decision No. 81 of 2023, provided that at least two of those institutional investors are not Related Parties (the 'REIT ownership condition').

• The REIT has an average Real Estate Asset Percentage of at least 70% during the relevant Gregorian calendar year or the relevant 12-month period for which the financial statements are prepared (the 'REIT real estate percentage condition').

A failure to meet the conditions would not immediately cause a Qualifying Investment Fund to lose its status, if the conditions of Article 4(6) of the Corporate Tax Law and Ministerial Decision No. 105 of 2023 are met (as explained in Section 5.1.2). ^[63] However, in other cases, each of the conditions outlined above must be met continuously during the relevant Tax Period by the Qualifying Investment Fund or the REIT, as the case may be, in order to be treated as an Exempt Person during such Tax Period.

Each of these conditions is discussed in detail in this section. In addition, this section will discuss the conditions for entities wholly owned and controlled by a Qualifying Investment Fund to be treated as an Exempt Person. ^[64]

Persons eligible for Qualifying Investment Fund status

A Qualifying Investment Fund is an Exempt Person, which means it is a Person exempt from Corporate Tax. ^[65]Natural persons and juridical persons are regarded as Persons.^[66] A natural person cannot be a Qualifying Investment Fund. Thus, subject to the exception referred to below, only a juridical person can be a Qualifying Investment Fund.

If an election has been made to treat an Unincorporated Partnership as a Taxable Person in its own right (i.e. as fiscally opaque), ^[67] it can make an application to be a Qualifying Investment Fund, provided the relevant conditions are met.

If a foreign incorporated investment fund entity is subject to Corporate Tax as either a Resident Person (for example, due to effective management and control in the UAE) or as a Non-Resident Person (for example, due to a Permanent Establishment or other nexus in the UAE), it can apply to be exempt from Corporate Tax as a Qualifying Investment Fund, if it meets the relevant conditions.

A Free Zone Person may apply to the FTA to be exempt from Corporate Tax as a Qualifying Investment Fund if the relevant conditions are met.

Impact of not meeting the conditions in later Tax Periods

Once any of the conditions for a Qualifying Investment Fund are no longer met at any particular time during a Tax Period, the Qualifying Investment Fund will cease to be an Exempt Person from the start of the Tax Period during which it ceased to meet the relevant condition. ^[68]

However, a Qualifying Investment Fund would not lose its status from the start of the Tax Period if:

1. It fails to meet the conditions as a result of its liquidation or termination, or

2. The failure to meet the conditions is of a temporary nature and will be promptly rectified, and appropriate procedures are in place to monitor compliance with the relevant conditions. ^[69]

In respect of (1), the Qualifying Investment Fund must notify the FTA within 20 business days from the date of the beginning of the liquidation or termination procedures. ^[70] In such a case, the Qualifying Investment Fund shall cease to be an Exempt Person on the day following the date of the completion of the liquidation or termination procedure. ^[71]

In respect of (2), the Qualifying Investment Fund shall continue to be an Exempt Person if all of the following conditions are met: ^[72]

1. The failure to meet the conditions is due to a situation or an event beyond the Qualifying Investment Fund's control which it could not reasonably have predicted or prevented.

2. The Qualifying Investment Fund has made an application to the FTA to continue to be treated as an Exempt Person within 20 business days from the date it fails to meet the conditions of a Qualifying Investment Fund. The FTA shall review the application and notify its decision within 20 business days of the submission of the application or, if the FTA has notified the Qualifying Investment Fund, such other time period required to review the application.

3. It is reasonably expected to rectify the failure to meet the conditions within 20 business days from the submission of such application. This period may be extended upon request (and subject to approval by the FTA) for another 20 business days if the failure to rectify is beyond the Qualifying Investment Fund's reasonable control. ^[73]

4. Upon request by the FTA, the Qualifying Investment Fund provides evidence to support putting in place the appropriate procedures to monitor the compliance with the relevant conditions of the Corporate Tax Law, within 20 business days from the date of the request by the FTA, or any other period as may be determined by the FTA.

If the failure to meet the conditions is not of a temporary nature, an investment fund entity will cease to be a Qualifying Investment Fund. If so, this will mean:

• It will no longer be an Exempt Person and, as a result, will be subject to Corporate Tax as a Taxable Person from the start of the Tax Period in which the conditions were not met. ^[74] If the Taxable Person does not realise the conditions are not met, it is possible it mistakenly does not file Tax Returns for one or more Tax Periods. In such a case, it would be liable for penalties for its failure to file a Tax Return.

• Any entities wholly owned and controlled by such an investment fund will no longer be an Exempt Person under Article 4(1)(h) of the Corporate Tax Law. Such entities will cease to be an Exempt Person for any of their Tax Periods, where they are no longer continuously wholly owned and controlled by a Qualifying Investment Fund.

• Investors in such an investment fund that are Taxable Persons should no longer include the relevant net income in their income as of that date.^[75]

• Any feeder funds investing in such an investment fund should no longer count a proportional part of the Revenue of the investment fund for the purpose of the Investment Business condition (as explained in Section 5.5)

• If such an investment fund invests in a second investment fund, the second investment fund should no longer look through the first investment fund for the purpose of the diversity of ownership condition (as explained in Section 5.6).

Regulatory oversight condition

Regulatory oversight generally provides a legal framework for the promotion and distribution of investment opportunities to UAE investors and for ensuring appropriate risk management, investor rights protection and communication to investors about investment risks.

The regulatory oversight condition requires that the investment fund or the investment fund's manager must be subject to the regulatory oversight of a competent authority in the UAE, or a recognised foreign competent authority. ^[76]

There are three different competent authorities responsible for the authorisation and supervision of UAE financial institutions which includes investment funds and investment managers. These are:

• The Securities and Commodities Authority ('SCA') which regulates markets, listed companies and securities brokers within the UAE (other than those resident in DIFC and ADGM),

• The Dubai Financial Services Authority ('DFSA'), which is the regulator of the Dubai International Financial Centre ('DIFC'), and

• The Financial Services Regulatory Authority ('FSRA'), which is the regulator of the Abu Dhabi Global Market ('ADGM').

Whilst, in practice, it may be difficult for a non-resident fund manager of a UAE investment fund to carry on all its activities without requiring a Licence or registration in the UAE, the Qualifying Investment Fund status could also be available if the fund manager of a UAE managed fund is subject to regulatory oversight by a foreign authority that is recognised as competent to regulate fund management activities. The inclusion of foreign competent authorities is also relevant to cover non-UAE incorporated investment funds that are not Resident Persons, but are Taxable Persons due to having a Permanent Establishment in the UAE or a nexus in the UAE as specified in Cabinet Decision No. 56 of 2023 and wish to apply for the Qualifying Investment Fund exemption.

A foreign authority will generally be considered a 'foreign competent authority' if it subjects an investment fund or its manager to regulatory oversight with the aim of protecting matters such as financial stability, interests of investors in collective investment schemes and preventing disproportionate financial risks and fraudulent activities by investment managers.

Fund ownership condition

To be a Qualifying Investment Fund, interests in the investment fund need to be either:^[77]

1. Traded on a Recognised Stock Exchange, or

2. Marketed and made available sufficiently widely to investors.

A Recognised Stock Exchange includes a stock exchange established in the UAE that is licensed and regulated by the relevant competent authority (such as the Abu Dhabi Securities Exchange ('ADX'), Dubai Financial Market ('DFM'), and Nasdaq Dubai), or a foreign stock exchange that is licensed and regulated by the relevant foreign competent authority and has an equal standing to that of a UAE stock exchange. Whether a stock exchange established outside the UAE has equal standing is dependent on whether that stock exchange that is recognised as such for the purpose of its local legislation.

The fund ownership condition can also be met if a fund is considered marketed and made available sufficiently widely to investors. This means that the fund needs to demonstrate it has attempted to achieve a diversity of ownership. However, if a fund (other than a REIT) has achieved a diversity of ownership in line with the diversity of ownership condition described in Section 5.6 below, it would be reasonable to conclude that the fund has been marketed and made available sufficiently widely and, as a result, the fund ownership condition would be met.

Main purpose condition

Qualifying Investment Fund status is not available for funds when the main or principal purpose of the fund is to avoid UAE Corporate Tax. The main or principal purpose condition refers specifically to UAE Corporate Tax and does not extend to foreign taxes.

The main purpose condition is intended to prevent the avoidance of Corporate Tax, but is not intended to prevent the application of the Qualifying Investment Fund status for investment fund entities that were established with the main purpose of pooling and investing of funds received from investors on a collective basis. Whether a fund has been set up with the main purpose of avoiding Corporate Tax will be determined on a case by case basis. The mere fact that a fund has been set up with the expectation that it will be an Exempt Person does not mean avoidance of Corporate Tax is its main purpose. However, where a Corporate Tax benefit is the only commercial benefit of a structure, this could be an indication that the main purpose condition is not met.

Investment Business condition

Diversity of ownership condition

Investment Manager condition

The Investment Manager condition requires that the Investment Manager that is managing or advising the investment fund must have a minimum of three investment professionals. This condition does not apply to REITs.

An Investment Manager is defined in the Corporate Tax Law as 'a Person who provides brokerage or investment management services that is subject to regulatory oversight in the UAE'. The requirement that an Investment Manager is subject to regulatory oversight in the UAE should be assessed in line with the regulatory oversight condition discussed in Section 5.2.

The question as to whether the Investment Manager has at least three investment professionals does not necessarily require them to be full-time equivalent (FTE) employees. They can serve as independent contractors working in an individual capacity for the Investment Manager. The condition would still be met if the Investment Manager has no or very limited staff and all of its functions are subcontracted to one or more other companies in the Business of managing or advising investment funds on investment related matters. The condition does not require that the three investment professionals work exclusively for the investment fund that is applying for Qualifying Investment Fund status. For instance, the Investment Manager could manage several funds and the investment professionals could divide their time over the range of funds.

Investment professionals are those who carry out any type of activity that forms part of the Investment Managers' core activities. This is not restricted to the most senior decision makers. It may include staff that identify and analyse investment opportunities, or assess the performance of investments. It also includes staff that negotiate investment contracts, maintain relations with advisers, investors and companies invested in and staff that help execute investments or disposals.

As a result, investment professionals can have a wide variety of professional backgrounds. Investment Managers often designate certain staff as a 'deal team', if they focus exclusively on managing the whole process relating to a certain investment. A legal specialist that assists on the contract negotiation and manages external legal advisers could also be regarded as an investment professional. Similarly, a professional who focuses on 'investor relations' could also be regarded as an investment professional.

However, a person who only performs administrative tasks relating to the Investment Manager itself (such as IT, office management or financial accounting of the Investment Manager itself), which are not considered as core to the Business Activity of the Investment Managers, would not be regarded as an investment professional.

Independence condition

The independence condition requires that investors do not have control over the day- to-day management of the investment fund. ^[93] These could include routine decisions conducted in the ordinary course of Business, day to day management and supervision and operational decisions. This condition does not apply to REITs.

Merely having a right to be consulted or to give directions does not result in an investor having day-to-day control. So, for example, the right to a vote at annual general meetings would not be considered to amount to day-to-day control.

However, if an Investment Manager holds an ownership interest in the investment fund it manages, this would not prevent the fund meeting the independence condition.

Many investment funds have advisory committees or investment committees that make key decisions in relation to the investment fund. Usually, these committees consist of key investors, independent investment subject matter experts and/or representatives of the Investment Manager. It is a question of fact whether the advisory committee or investment committee exercises day-to-day management. However, it would generally not be expected that the day-to-day management role of the investment fund would be assumed by such a committee. Even if investors are represented in such committee, they would exercise their authority as a committee of the investment fund rather than in their capacity of investor. Therefore, if an investment fund has an advisory committee or investment committee which includes key investors, this fact does not by itself lead to failure to meet the condition.

Additional conditions applicable to REITs

Conditions for Exempt Person status for entity held by a Qualifying Investment Fund

Applying for Qualifying Investment Fund exemption

An investment fund entity can only apply for the exemption after it has been registered with the FTA and obtained a Tax Registration Number for Corporate Tax purposes. ^[105] When the Qualifying Investment Fund conditions are met, an investment fund can make an application to the FTA for exemption from Corporate Tax.

This application should specify for which Tax Period the Qualifying Investment Fund intends to be an Exempt Person. Upon the review of the application, the FTA shall either accept or reject the application and specify from which Tax Period the Qualifying Investment Fund status applies. The FTA shall also specify the reason in case of a rejection.

Where an application is approved, the Qualifying Investment Fund will be an Exempt Person and will not be subject to Corporate Tax.

Earliest date an application can be effective

The Exempt Person status will apply from the start of the Tax Period specified in the application, if the application is approved by the FTA. The FTA can apply a different starting date for the Qualifying Investment Fund, as follows: ^[106]

• If the Tax Period specified in the registration form is incorrect, the Qualifying Investment Fund status shall be effective as from the correct date.

• If the applicant is acquired during a Tax Period by a Qualifying Investment Fund, an application under Article 4(1)(h) of the Corporate Tax Law will not be granted if the conditions were not met at the start of the Tax Period. The FTA shall determine another date from which the exemption is granted to ensure that the date of exemption starts after meeting all remaining conditions.

• If the Tax Period included in the application is incorrect and the FTA receives sufficient supporting evidence that the conditions have been met in the later Tax Periods, the exemption shall be effective from the date of meeting the conditions.

The FTA requires an annual declaration confirming that the exemption conditions are maintained, no later than nine months from the end of the relevant Tax Period. ^[107] In addition, a Qualifying Investment Fund should maintain all records that enable its exempt status to be readily ascertained by the FTA for a period of 7 years following the end of the Tax Period to which they relate. ^[108]

Overview

The Investment Manager Exemption intends to prevent regulated UAE-based investment managers and brokers triggering a liability to Corporate Tax for foreign investors in common commercial fact patterns.

This should allow Investment Managers to provide discretionary investment management services and to enter into transactions on behalf of foreign customers without triggering a Permanent Establishment for the foreign investor or a foreign investment entity.

Under the Permanent Establishment definition in Article 14 of the Corporate Tax Law, a Non-Resident Person could have a Permanent Establishment in the UAE if a Person has and habitually exercises an authority to conduct a Business or Business Activity in the UAE on behalf of a Non-Resident Person if any of the following conditions are met: ^[109]

1. A Person habitually concludes contracts on behalf of the Non-Resident Person, or

2. A Person habitually negotiates contracts that are concluded by the Non-Resident Person without the need for material modification by the Non-Resident Person.

However, a Permanent Establishment would not arise as a result of a Person conducting such activities on behalf of the Non-Resident Person as an independent agent acting in the ordinary course of the agent's Business. ^[110]

Without the Investment Manager Exemption, the activities of an Investment Manager may trigger a Permanent Establishment in the UAE for a Non-Resident Person. This risk may be perceived to arise where the Person invests in a fund managed by an Investment Manager based in the UAE, or engages an Investment Manager based in the UAE as broker, or where it engages an Investment Manager based in the UAE in any other capacity to manage its investments.

In all these scenarios, the Investment Manager may negotiate or conclude investment contracts on behalf of the Non-Resident Person. Even though it is expected that, as a Business that is separate from the Non-Resident Person, the Investment Manager acts in an independent capacity in the ordinary course of its Business, this condition may be perceived as imprecise and as a result, risk-adverse investors may decide not to use an Investment Manager based in the UAE.

To prevent such outcomes, the UAE based Investment Manager is treated as an independent agent for the purposes of Article 14(6) of the Corporate Tax Law when acting on behalf of a foreign or Non-Resident Person provided that the conditions specified in Article 15(1) of the Corporate Tax Law are met.

The conditions for the Investment Manager Exemption are as follows: ^[111]

1. The Investment Manager is engaged in the business of providing investment management or brokerage services (the 'investment manager or brokerage services condition').

2. The Investment Manager is subject to the regulatory oversight of the competent authority in the UAE (the 'regulatory oversight condition').

3. The transactions are carried out in the ordinary course of the Investment Manager's Business (the 'ordinary course of Business condition').

4. The Investment Manager acts in relation to the transactions in an independent capacity (the 'independent capacity condition').

5. The Investment Manager transacts on an arm's length basis with the Non- Resident Person and receives due compensation for the provision of services (the 'arm's length condition').

6. The Investment Manager is not the Non-Resident Person's representative in the State in relation to any other income or transaction that is subject to Corporate Tax for the same Tax Period (the 'no other representation relation condition').

7. Any such other conditions as may be prescribed in a decision issued by the Cabinet at the suggestion of the Minister (currently there are none).

The Investment Manager Exemption applies automatically if the conditions are met. In other words, no election or application is required for the Investment Manager Exemption.

Impact of not meeting the Investment Manager Exemption

If the conditions of the Investment Manager Exemption are not met, this does not mean that the Non-Resident Person automatically has a Permanent Establishment in the UAE. It should instead be assessed whether the activities of the Investment Manager create a Permanent Establishment for the Non-Resident based on the application of Article 14 of the Corporate Tax Law.

For instance, if a Non-Resident Person engages an Investment Manager to write a report for general information purposes, these services are unlikely to be investment management or brokerage services. As a result, the conditions for the Investment Manager Exemption would not be met. However, the Investment Manager is not conducting a Business or Business Activity on behalf of the Non-Resident Person in such circumstances. Therefore, such an activity, by itself, would not result in the Investment Manager creating a Permanent Establishment of the Non-Resident Person within the meaning of Article 14 of the Corporate Tax Law, even though the conditions of the Investment Manager Exemption are not met.

In this case and other cases where the conditions of the Investment Manager Exemption are not met, Article 14 of the Corporate Tax Law should be applied to assess whether the Non-Resident Person has a Permanent Establishment in the UAE. Further, even if a Permanent Establishment exists under Article 14 of the Corporate Tax Law, a Taxable Person can assess whether any relief from Corporate Tax is available under a relevant Double Taxation Agreement.

Investment management or brokerage services condition

The Investment Manager Exemption is available if the Investment Manager is engaged in the Business of providing investment management or brokerage services. These items are described separately below.

Regulatory oversight condition

The Investment Manager Exemption only applies if the investment management or brokerage services are subject to regulatory oversight in the UAE. ^[112]

In the UAE, the competent authorities are currently the SCA, the DFSA and the FSRA. Brokers or investment managers that have been authorised by any of these authorities to perform brokerage or investment management activities should meet the regulatory oversight condition.

Ordinary course of Business condition

The Investment Manager Exemption only applies if the transactions are carried out in the ordinary course of Business of the Investment Manager. ^[113] The expression 'ordinary course of Business' is in relation to investment management and brokerage- related services. If the Investment Manager has Business Activities that are not investment management or brokerage services, the Investment Manager Exemption will not apply to those other Business Activities. The ordinary course of Business condition will usually be met if an Investment Manager carries out activities that are consistent with their Business as Investment Manager.

The fact that an Investment Manager performs activities outside their core area of expertise does not prevent this condition from being met. For instance, if an Investment Manager specialising in private equity funds also manages a debt fund, this should still be considered to fall within their ordinary course of Business. Similarly, an Investment Manager specialising in managing REITs could also separately manage an equity fund on behalf of a Non-Resident Person. The lack of track record or specific experience in relation to the transactions performed by the Investment Manager should not prevent the ordinary course of Business condition being met, as it can be expected that Investment Managers would often seek to expand and/or diversify the type of transactions they conduct.

Managing investment funds or investors can create sufficient work for a sizeable team of investment management professionals. Therefore, if the Investment Manager's Business Activity consists exclusively or almost exclusively of managing one investment fund or one client account, this does not prevent the ordinary course of Business condition being met. However, in such a case it should be assessed whether the Investment Manager still meets the independent capacity condition (see below).

Given the nature of investment management and brokerage Business Activity, the Investment Manager Exemption is not intended to apply in respect of operational or commercial contracts that have no investment purpose. In line with this, the ordinary course of Business condition requires that the Investment Manager performs its services in relation to 'transactions', which are limited to the following transactions that can be considered customary for investment management and brokerage services: ^[114]

1. Transactions in commodities, real property, bonds, shares, derivatives or securities of any other description,

2. Transactions of buying or selling any foreign currency or placement of funds at interest, and

3. Such other transactions permissible to be carried out by the Investment Manager on behalf of a Non-Resident Person under the applicable (non-tax) legislation of the UAE.

Independent capacity condition

The Investment Manager Exemption only applies if the Investment Manager acts in relation to the transactions in an independent capacity. ^[115] This would be the case if it is not bound by detailed instructions or comprehensive control on how to perform its services and use its professional discretion to optimise investment decisions or connect parties as part of a transaction where they act as broker. In such cases, the Non-Resident Person would rely on the special skill and knowledge of the Investment Manager, which supports that the Investment Manager is acting in an independent capacity. However, it may be more difficult for an Investment Manager to maintain and demonstrate an independent capacity if either:

• The Non-Resident Person is a Related Party, or

• The Investment Manager is legally or economically dependent or acts exclusively or almost exclusively on behalf of the Non-Resident Person.

If the Non-Resident Person is a Related Party, the independent capacity condition could still be met if the Investment Manager acts in an independent capacity based on its actual conduct. This could be the case if the Investment Manager performs similar services for Persons who are not a Related Party, and it conducts those services in a similar way. Alternatively, it could be the case if procedures are put in place to prevent the Non-Resident Person from direct interference with the investment management services and such procedures are adhered to.

If the Investment Manager performs services exclusively or almost exclusively for one Non-Resident Person, situations could arise where the Investment Manager is economically dependent on the Non-Resident Person. If so, the Investment Manager may struggle to keep providing investment management services in an independent capacity, as it might feel pressured to more closely follow suggestions made by the Non-Resident Person. However, this fact is not by itself determinative and all facts and circumstances need to be taken into account to determine whether the Investment Manager acts in an independent capacity. If the Investment Manager acts in an independent capacity based on its actual conduct, the independent capacity condition would still be met provided the transactions and arrangements are consistent with the arm's length standard. This means it would use its professional judgement and discretion in the investment management services rather than relying on instructions by the Non-Resident Person.

In the case of investment funds, an Investment Manager's ability to act independently is usually protected by the fact that it cannot easily be replaced. As the Investment Manager's position is effectively 'locked in', the Investment Manager would not be economically dependent on the investors of the investment fund. Although the Investment Manager would earn all or almost all of its income from the investment fund itself, it would usually control the decision making of the investment fund and therefore would not be dependent on the instructions of the investment fund. As a result, the Investment Manager would usually be able to act in an independent capacity in such cases.

Whether the Investment Manager acts in an independent capacity should be tested in relation to the transaction in respect of which the Investment Manager Exemption is intended to be applied. Please refer to Section 7.5 for the meaning of the expression 'transactions'.

Arm's length condition

The Investment Manager Exemption only applies if investment management or brokerage transactions and arrangements are on an arm's length basis with the Non- Resident Person and, accordingly, the Investment Manager receives due compensation for its services. ^[116]

It is possible that an Investment Manager provides investment management or brokerage services to Related Parties. In such a case, this condition will be met if the services are remunerated consistent with the arm's length standard. If a retroactive 'true-up' adjustment is made to Taxable Income to comply with the arm's length standard, this is considered remuneration consistent with the arm's length standard.

If the fee for the Investment Manager is the result of a third-party arrangement and subject to arm's length commercial negotiations, it would be considered arm's length and the arm's length condition would be met.

For example, if an Investment Manager enters into an investment management agreement with an investment fund established by it (or one of its Related Parties), the fees paid by the investment fund will economically be borne by the investors in the investment fund. Investors that are not Related Parties of the Investment Manager will only invest in the investment fund if they agree to the fee structure. If third-party investors agree to the fund documentation that specified the fee arrangements, those fees would be regarded arm's length. If the majority of ownership interests in an investment fund is held by such third-party investors who agreed to the fee arrangements in such a way that the same or lower fees are charged, yet the equivalent amount is economically borne by any Related Parties that hold an ownership interest in the investment fund, then the arm's length condition would be met.

If a fund structure includes several entities, it is possible that the Investment Manager received an arm's length remuneration only from a single entity which remunerates services provided to several entities included in a fund structure. In this case, the arm's length condition will be met.

Similarly, if the Investment Manager has agreed to offer certain co-investment opportunities to key investors without a specific remuneration, the arm's length condition is also considered to be met, provided the overall compensation that the Investment Manager receives for its services is an arm's length amount.

Investment funds can allow staff of the Investment Manager to co-invest. Often, this co-investment is structured as carried interest. This means that the carried interest holders would only receive a return if the investment fund has received a return on investment above a certain rate (the 'hurdle rate'). Once the hurdle rate has been reached, a portion of any additional return (for example, 20%) is allocated to the carried interest holders.

The carried interest holders are often (but not always) grouped in a separate fund vehicle which is also managed by the Investment Manager. This is effectively a feeder fund. The Investment Manager may or may not charge a fee to the carried interest holders. However, the carried interest holders would only receive a return on investment once all expenses of the main fund have been paid, including the management fee charged by the Investment Manager. As mentioned earlier, this could arise from the commercial arrangement between parties and it is possible that the Investment Manager received an arm's length remuneration only from a single carried interest holder which remunerates services provided to several such holders. In this case, the arm's length condition will be met as long the overall compensation is in accordance with the arm's length standard for managing a carried interest vehicle.

No other representation relation condition

The Investment Manager Exemption only applies if the Investment Manager does not represent the Non-Resident Person in relation to any other income or transaction that is subject to Corporate Tax in the UAE. ^[117] This means that if the Investment Manager represents the Non-Resident Person in relation to any matter not connected with the Investment Manager's role as an investment manager and this representation has triggered a Permanent Establishment in the UAE under Article 14(1)(b) of the Corporate Tax Law, the Investment Manager Exemption will not apply in relation to any representation of such Investment Manager.

If a Non-Resident Person is liable to Corporate Tax due to receiving State Sourced Income (not currently applicable), or a nexus outlined in Cabinet Decision No. 56 of 2023, their liability to Corporate Tax is the result of receiving income of a certain type. In other words, the Non-Resident Person's liability to Corporate Tax would have occurred regardless of whether an Investment Manager has represented them in relation to such transactions. Therefore, if a Non-Resident Person is liable to Corporate Tax only as a result of State Sourced Income (not currently applicable), or a nexus outlined in Cabinet Decision No. 56 of 2023, the no other representation relation condition could still be met.

If a Non-Resident Person already has an existing Permanent Establishment that is unrelated to the activities of the Investment Manager, it is still possible to meet the no other representation relation condition.

For example, if a foreign company ('Company X') leases a shop in the UAE through which it retails its consumer products for its own account, that shop may constitute a fixed place of Business and Company X may have a Permanent Establishment in the UAE. If the foreign company has generated a significant amount of cash from their global operations (not connected to the Permanent Establishment in the UAE), it could use the services of an Investment Manager in the UAE to invest on its behalf. Even though Company X has a Permanent Establishment in the UAE, the Investment Manager does not act as a representative for Company X in relation to any of the activities of the Permanent Establishment. Therefore, the no other representation condition is met and it is possible to apply the Investment Manager Exemption for the return on investments earned by Company X through the Investment Manager, if the other conditions are also met.

Other conditions

Article 15(1)(g) of the Corporate Tax Law allows the Cabinet to set additional conditions on the Investment Manager Exemption. Currently, no additional conditions have been set.