STOP PRESS - the REIT listing condition was further modified for REITs listing during May 2025, see Ministerial Decision No. [96] of 2025: Ministerial-Decision-No.-96-of-2025-on-Conditions-to-Exempt-Certain-Real-Estate-Investment-Trusts-from-Corporate-Tax.pdf
The new Cabinet Decision No.34 of 2025 on Qualifying Investment Funds and Qualifying Limited Partnerships for the Purposes of Federal Decree Law No.47 of 2022 (the '2025 decision') was issued by the Cabinet of the UAE on 27 March 2025. The decision replaces the provisions of Cabinet Decision No.81 of 2023 (the '2023 decision'), and limits investors' potential UAE Corporate Tax ('Corporate Tax') exposure when investing in UAE Qualifying Investment Funds ('QIFs') and UAE Real Estate Investment Trusts ('REITs'). The new decision adds greater flexibility and introduces a new regime for Qualifying Limited Partnerships ('QLPs') which are also exempt from Corporate Tax, providing additional benefits to investors and enhancing the UAE's attractiveness as a fund domicile.
Background
Under the 2023 decision, whilst QIFs themselves were exempt from Corporate Tax where the relevant qualifying conditions were satisfied, investors QIFs who were themselves subject to Corporate Tax were taxed on the income they received from the QIF, unless the QIF's income would itself have been exempt from Corporate Tax. The 2025 decision has changed this position. A QIF that meets the necessary conditions remains exempt from Corporate Tax, however, all income paid from a QIF to investors within the scope of Corporate Tax is now also exempt from Corporate Tax, provided the QIF meets certain thresholds as discussed below. The 2025 decision also introduces greater flexibility to these thresholds. It has also reduced the potential Corporate Tax liability for relevant investors in qualifying REITs and introduced a regime for tax exempt QLPs.
QIFs
As under the 2023 decision, a QIF's income remains generally exempt from Corporate Tax in the hands of the QIF. Under the 2023 decision, however, while income received by a QIF was exempt from Corporate Tax, when the QIF paid out to investors, the investors' income from the QIF was generally taken into account for Corporate Tax purposes (unless it constituted personal investment income or real estate investment income in the hands of a natural person). Otherwise, an investor's income from the QIF was only exempt from Corporate Tax to the extent that it related to income which was itself exempt when received by the QIF.
Under the new decision, all income paid from a QIF to investors will be exempt from Corporate Tax (for tax periods commencing on or after 1 January 2025), regardless of whether the income received by the QIF was originally exempt. The taxable income of QIF investors therefore excludes any profit distributions received from the QIF. This is subject to the application of the diversity of control conditions and immovable property thresholds set out below (though the new decision has introduced a grace period here and additional protection for investors who are not responsible for breaching the diversity of control conditions).
Diversity of control conditions
The diversity of control conditions prohibit on juridical person (an entity with legal personality), along with their related parties, from exercising significant control over the profits or decision making of the QIF or from holding a certain level of Ownership Interests in the QIF. Where an investment fund has fewer than 10 investors, if a juridical person and their related parties: (i) own 30% or more of the Ownership Interests in the QIF; (ii) determine the composition of 30% or more of the board of directors (or equivalent) of the QIF; (iii) receive 30% or more of the profits of the QIF; or (iv) otherwise determine or exercise significant influence over the conduct of business of the QIF, such juridical persona and its related parties will lose the Corporate Tax exemption in respect of returns derived from the QIF, with such amounts being included in their Corporate Tax calculations. If the QIF has 10 or more investors, the relevant 30% thresholds are raised to 50%.
As under the 2023 decision, the diversity of control conditions do not apply in the QIF's first two financial years, provided the fund can demonstrate that it intends to comply with the thresholds from its third financial year. This window is effectively a grace period for new QIFs which are in the process of generating a sufficiently diverse level of investment. However, unlike under the 2023 decision, the new rules have extended this flexibility beyond the first two financial years where the 30/50% rule is breached for 90 or fewer days in the aggregate in any given year and for reasons outside the control of the QIF or investor. In these circumstances, the QIF will still be exempt from Corporate Tax and innocent investors (i.e. those not responsible for the breach) will remain exempt from any Corporate Tax liability on income received from the QIF. A further relaxation of the diversity of control conditions will also apply where the QIF is in the course of liquidation or termination.
This position differs from the application of the diversity of control conditions under the 2023 decision. Under the 2023 decision, where the diversity of control conditions were breached by an investor following the initial two year grace period, the QIF itself would cease to meet the requirements to remain a QIF and would itself lose its Corporate Tax exemption under the regime (subject to the limited circumstances where such non-compliance could be rectified). This is therefore a very welcome change.
10% immovable property threshold
Where a QIF breaches the 10% immovable property threshold (in that the value of immovable property located in the UAE held by the QIF exceeds 10% of the total value of the assets held by the QIF), the taxable income of an investor that is a juridical person in that QIF will be adjusted upwards to include 80% of the income that the investor received from the fund’s immovable property income. In other words, investors who would otherwise benefit from the Corporate Tax exemption described above will be subject to tax on 80% of the income they receive that derives from the QIF’s immovable property income (and 20% of the income paid to investors that are juridical persons that derives from the QIF’s immovable property income continues to be exempt).
REITs
The 2025 decision has similarly reduced the tax liability for juridical investors in qualifying REITs. Juridical investors are now subject to tax on only 80% of the real estate income derived through the REIT. The 2025 decision has also tweaked the conditions that must be satisfied to exempt a REIT from Corporate Tax, with an additional requirement to provide investors with all information necessary to calculate their taxable income.
QLPs
The 2025 decision introduces a new regime for QLPs. QLPs may now also apply to be exempt from Corporate Tax. To qualify for this exemption, the limited partnership:
- must conduct principal business or business activities that are investment business, and any other business activities it conducts must be ancillary / incidental to the investment business (these activities will be considered to be ancillary / incidental where their combined Revenue does not exceed 5% of the total Revenue of the QLP in the relevant Financial Year),
- cannot derive any income from immovable property located in the UAE, and
- must not have as its main or principal purpose the avoidance of Corporate Tax.
UAE entities that are wholly owned by a QLP, directly or indirectly, may also be exempt from Corporate Tax in certain circumstances, provided the entity does not derive any income from immovable property in the UAE.
The taxable income of a person that is subject to Corporate Tax in the UAE that invests in a QLP will be adjusted to exclude any profit distributions received from the QLP. However, such investor’s taxable income will be adjusted to include the pro-rated net income of the QLP and any exempt juridical person that is wholly directly or indirectly owned and controlled by the QLP, as reflected in the financial statements, in proportion to the Ownership Interest that investor has in the QLP.
Where the relevant conditions are met, therefore, a QLP is likely to prove an attractive vehicle for both UAE and non-UAE investors.
