UAE CT: Tax On the Real Estate Investment Trust (REIT)

In our previous article, we explained that an investment fund serves as a vehicle for investors to pool their resources and invest in various portfolios. The fund is overseen by a fund manager, who is responsible for purchasing, holding, and selling investments on behalf of the investors.

We also noted that investment funds in the UAE can be categorized as public funds (accessible to the general public) or private funds (available only to professional investors). These funds may be classified as either open-ended (with variable capital) or closed-ended (with fixed capital).

Additionally, we emphasized that tax-registered investment funds that apply to the Federal Tax Authority (FTA) for corporate tax exemption are designated as Qualifying Investment Funds (QIF) once they receive approval from the FTA. Only juridical investment funds qualify for this exemption, since the income of natural person investment funds, such as unincorporated partnerships, is already exempt at the fund’s level.

Common Conditions under Article 10 of the law:

The FTA will approve investment funds for QIF classification if the fund or its manager is regulated by a competent Authority, if interests in the investment fund are traded on a recognized stock exchange or widely marketed to investors, and if the main purpose of the investment fund is not to avoid corporate tax. Additionally, clause 10(1)(d) of the article stipulates that any other conditions may be set forth in a decision issued by the cabinet at the suggestion of the Minister.

Additional Conditions for REAT:

In pursuant to article 10(1)(d) of the law, the Cabinet Decision No. 81 of 2023 was issued. The article 3 of the CD 81/2023 requires that the Real Estate Investment Trust (REIT) is managing the real estate assets, excluding land, valued at over AED 100 million; at least 20% of its share capital must be listed on a recognized stock exchange, or it should be wholly owned by two or more institutional investors which are not related parties; additionally, the REIT must maintain an average Real Estate Asset Percentage (REAP) of at least 70% during the relevant Gregorian calendar year or the applicable 12-month period for which financial statements are prepared.

The REIT minimum asset value requirement stipulates that the total value of real estate assets, excluding land, managed or owned by the REIT must exceed AED 100 million. This value is determined based on the carrying value of real estate as reported in the REIT's financial statements. The condition allows for the possibility that the REIT does not hold the legal title to the real estate, as long as it is managed by the REIT. Additionally, a REIT may manage its real estate assets through wholly owned companies, such as special purpose vehicles (SPVs). If these SPVs qualify as Exempt Persons under Article 4(1)(h) of the Corporate Tax Law, and the REIT allocates net income available for distribution to its investors based on its consolidated financial statements, then any real estate assets held by these Exempt Persons will also be included in the valuation. Conversely, if the REIT does not base its net income allocation on consolidated financial statements, the real estate assets held by its SPVs, which are Exempt Persons under Article 4(1)(h), can still be aggregated to satisfy the minimum asset value condition.

The REIT ownership condition requires at least one of the following to be met: 20% or more of the share capital of the REIT is floated on a recognized stock exchange. This only includes shares (or ownership interests) that are available for trading on the recognized stock exchange. It excludes closely held and restricted shares (i.e. shares that cannot be traded on the recognized Stock Exchange, even if the investor is willing to trade them).

The institutional investors include various types of entities such as federal government, local government, government-controlled entities, foreign government institutions and authorities, and international organizations. Additionally, it encompasses banks, insurance providers, pension or social security funds, and licensed investment entities.

The formula to calculate average REAP is the assets that are generating real estate income (excluding real estate gains) divided by the total value of the assets, multiplied by 100 which can be summarized as, [Real Estate income (excluding Real estate gains) generating assets/ Total Value of The Assets] *100. Real estate income is defined as income derived from renting of land or real estate, excluding real estate gains. ?Real estate gains are defined as gains derived from the sale or disposal of land or real estate. The value of real estate income generating assets and total assets should be determined based on the carrying value of real estate in the financial statements of the REIT. The threshold of 70% should be computed taking the average position throughout the year, based on the average of the quarterly closing balances. If at a particular quarter closing, the average is below 70%, the REIT real estate percentage condition will still be met, provided the average position for the financial year as a whole is still 70% or more.

Additional Conditions for Non-REAT:

The above additional conditions are applicable to the REITS only; and other than REIT, following additional conditions are applicable under article 10(1)(d) of the law, which has been required in the article 2 of the Cabinet Decision No. 81 of 2023, for the rest of the investment funds to apply exemption from corporate tax. The primary business of the investment fund involves conducting investment and related activities. If there are ten or fewer investors, a single investor and their related parties must not hold 30% or more of the portfolio. In cases with more than ten investors, no single investor along with its related parties should hold 50% or more of the investment portfolio. The fund must be managed by an investment manager with at least three investment professionals, and investors should not have control over the daily management of the investment fund.

Taxation of Qualifying Investment Fund:

QIFs are exempt from corporate tax because the investors in an investment fund are treated similarly to those who have invested directly in the underlying assets. This arrangement eliminates taxation at the investment fund level, ensuring that only the investors are taxed on their net investment returns on a proportional basis.

The QIF will distribute the net income available for distribution, as shown in its financial statements, across four categories: exempt income, interest income, income from immovable property in the UAE, and other income.

Exempt income encompasses dividend income from resident juridical persons (excluding dividends from exempt persons) and income from participating interests when the relevant conditions are satisfied. Interest income refers to amounts accrued or paid for the use of money or credit. Income from immovable property, as indicated by its name, includes the net income available for distribution from immovable property in the UAE. Other income consists of net income that does not fall into the categories of exempt income, interest income, or income from immovable property in the UAE.

Taxation on Investors:

As mentioned above, the QIF is exempt from corporate tax, and its net income will generally be taxable for investors according to general tax rules. For resident individual investors, this income will not be subject to tax as they are not required to take the license to make investment in the fund. While for resident juridical persons, exempt income will remain tax-exempt, taxable income will be taxable, interest income will be governed by the standard rules applicable to interest and so on. For the non-resident investors, the income related to the PE of the non-resident person, UAE sourced income; and income from nexus in the UAE, will be subject to tax.

Taxation on Investment Managers and Other Stakeholders:

The investment manager oversees the fund and earns income through brokerage fees and management fees. This income will be taxed in the regular course of business. If the fund manager is a resident juridical person, their worldwide income will be subject to tax. Conversely, if the fund manager is a non-resident juridical person, their UAE-sourced income will be subject to a 0% withholding tax, unless it qualifies as a permanent establishment (PE) of non-resident person (investment manager exemption conditions are not met as required under article 15 of the corporate tax law), in which case the income attributable to the PE of the nonresident person will be taxed in the UAE.

The conditions required to qualify as a QIF must be continuously satisfied throughout the tax period. Additionally, the QIF must submit an annual declaration to the FTA within nine months after the end of the relevant tax period, confirming compliance with these conditions.

Limitations of the Qualifying Investment Fund:

As an exempt person, the QIF cannot be included in a tax group or qualifying group, and it is unable to transfer its losses and enjoy benefits from any tax reliefs such as qualifying group relief or restructuring relief.

?The writer, Mahar Afzal, is a managing partner at Kress Cooper Management Consultants. The above is not his official but a personal opinion. For any queries/clarifications, please feel free to contact him at?[email protected] .

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