Taxation of Corporations and Businesses

UAE Investment Funds Just Got a Major Tax Update: Here's What You Need to Know 🚀

If you're in the world of investment funds in the UAE, you know that clarity and precision are everything. The rules of the game are constantly being refined, and the latest one comes in the form of a pivotal change to the Corporate Tax framework. Cabinet Decision No. 34 of 2025 has just been issued, and it’s a big deal.

This isn't just a simple tweak. It's a comprehensive roadmap that spells out who qualifies for tax exemption and, just as importantly, what it means for your investors. At Essence, we've broken down the legalese to give you the real-world impact.

Redefining a "Qualifying Investment Fund"

Think of a Qualifying Investment Fund as a passport to tax exemption. Previously, the rules were set by Cabinet Decision No. 81 of 2023, but this new decision repeals and replaces it with a far more detailed set of criteria.

To get this "passport," an investment fund (excluding REITs) must now:

• Be a true investment vehicle. The primary purpose must be "Investment Business"—that is, pooling funds to generate returns from a portfolio of assets. If you have other side activities, their revenue cannot exceed a small 5% threshold. It’s a clear line in the sand.

• Give control to the professionals. The day-to-day management must be in the hands of the fund managers, not the investors. This distinction is crucial for maintaining the fund's status.

• Keep investors in the loop. The fund has a clear obligation to provide all the information its investors need to calculate their own taxes accurately.

This framework ensures that only genuine collective investment schemes benefit from the exemption, preventing misuse of the tax-neutral status.

A New Twist: The "Look-Through" Rule for Investors

This is where things get interesting for investors. While the goal is for an investor to exclude their profit distributions from an exempt fund, the new decision introduces a "look-through" principle. This is designed to prevent a fund from being used as a simple holding company for a small group of owners.

Here are the scenarios where this applies, and it's a game-changer:

• When a Few Call the Shots: If a fund has a small number of investors (less than 10), and one investor (or a group of related parties) holds a significant ownership stake (30% or more), that investor can't simply take a tax-free distribution. Instead, they must include their prorated share of the fund's net profit in their own taxable income. For larger funds (10+ investors), that ownership threshold is a bit higher, at 50%. This is about substance over form.

• The Real Estate Catch: The decision also tackles the tax treatment of real estate. If a fund's holdings in UAE immovable property cross a 10% threshold, a juridical person investor must include 80% of their share of the fund's real estate income in their own taxable income. However, there's a simple way out: if the fund distributes 80% or more of that income to its investors within nine months, this rule doesn't apply.

Spotlight on REITs and Limited Partnerships

The decision also carves out special rules for other types of investment structures, recognizing their unique nature.

• REITs get their own lane. For a REIT to be exempt, it must meet specific conditions like having at least AED 100 million in immovable property and having a large portion of its shares floated on a stock exchange or held by institutional investors. These rules are tailored to ensure that only large, professionally managed, and widely-held real estate investment trusts benefit from the tax exemption.

• A new category is born. The decision formally introduces the "Qualifying Limited Partnership." This is a significant development for the private equity and venture capital space. The golden rule for these partnerships? They must have zero income from UAE immovable property. This strict condition sets them apart from REITs and highlights the government's clear intent to compartmentalize tax treatment based on asset class.

The Consequences of Non-Compliance

The decision isn't just about what you can do; it's also about what happens if you don't follow the rules. For a Qualifying Limited Partnership, for example, failing to apply for exemption or not meeting the conditions results in a hefty penalty: it loses its exempt status for the current tax period and the following four tax periods. That's a serious consequence that underscores the importance of getting this right.

What's Your Next Move?

The clock is ticking. This decision is already in effect, and the time to review your fund's structure, operations, and investor relationships is now. The complexity of these rules means that a one-size-fits-all approach won't work. Each fund's situation is unique.

At Essence, we specialize in helping businesses navigate these intricate regulations. We can help you assess your fund's qualification, ensure your reporting is compliant, and advise your investors on how to manage their tax obligations under this new framework.

Contact us today to ensure your fund is on a clear path to compliance.