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Investment Manager Exemption from Corporate Tax in UAE

Under the Investment Manager exemption, regulated investment managers and brokers based in the UAE can offer discretionary investment management services and execute transactions on behalf of foreign clients without triggering a Permanent Establishment for the foreign investor or the foreign investment entity. This exemption is made possible by treating a UAE-based Investment Manager as an independent agent when acting on behalf of a foreign or Non-Resident individual or entity, provided the conditions outlined in the Corporate Tax Law are met.

Conditions for Investment Managers to be Considered Independent Agents

The conditions specified in the Corporate Tax Law aim to ensure that the Investment Manager operates independently from the foreign individual or entity and conducts its business on its own behalf. The Investment Manager must offer investment management or brokerage services and be regulated by the competent authority in the UAE. Typically, this requirement is fulfilled when the Investment Manager holds the appropriate license to provide investment management or brokerage services in the UAE. Their activities should also be subject to regulatory oversight by the relevant mainland or free zone authority responsible for licensing and supervising investment managers and brokerage firms. Examples of such competent authorities include the Securities and Commodities Authority, the ADGM Financial Services Regulatory Authority, and the DIFC Financial Services Authority.

Whereas, transactions must be conducted as part of the Investment Manager's ordinary business operations. The Investment Manager must act on behalf of the foreign entity in the regular course of providing investment management or brokerage services. For instance, if a UAE-based and regulated investment management firm offers portfolio management services to a foreign entity or entities as part of its routine investment management function, it will be regarded as an independent Investment Manager within the scope of the Corporate Tax Law.

The Investment Manager must operate in an independent capacity. Although the Investment Manager may not be legally and economically independent from the foreign entity, for instance, if the Investment Manager exclusively or almost exclusively represents a single foreign investment fund, it must demonstrate that it acts independently when conducting transactions for the foreign entity to meet the criteria of an independent agent. This determination should consider the contractual and commercial relationship between the Investment Manager and the foreign entity, as well as other relevant facts and circumstances.

Indicators of the Investment Manager acting in an independent capacity may include the foreign entity being a widely held collective investment vehicle or the Investment Manager (along with its Related Parties or Connected Persons) not having a significant beneficial interest in the foreign entity.

Read More: Who Is Subject to the Corporate Tax in UAE?

Requirement of the Investment Manager’s Remuneration to Meet the Arm's Length.

To consider the relationship between the Investment Manager and the foreign entity as that of independent parties, they must transact with each other on arm's length terms. This implies that the remuneration structure of the Investment Manager should reflect commercially reasonable terms and result in the receipt of fees or other compensation that are customary or appropriate for the services rendered. Whether the remuneration is at a customary rate depends on factors such as the level of services provided, the foreign entity being an institutional or individual investor, and the investment strategy pursued by the foreign entity (passive portfolio management or active and alternative investment strategies).

Additionally, the Investment Manager must not act as an agent in the UAE with regard to other income or transactions. The exception granted by the Corporate Tax Law does not extend to the activities of the Investment Manager concerning any other business conducted by the foreign entity in the UAE or to transactions that would otherwise be subject to Corporate Tax. The statute aims to provide certainty regarding the tax treatment of transactions conducted through a UAE-based Investment Manager for foreign and Non-Resident Persons. 

Conclusively, Qualifying Transactions encompass various activities such as dealings in commodities, real estate, secured and unsecured debt obligations, warrants, foreign currency, futures, options, swaps, and other derivatives or securities. Additionally, the Investment Manager Exemption may extend to transactions involving carbon emission credits, crypto-assets, and other investment transactions permitted by the relevant statute to be conducted on behalf of foreign or Non-Resident Persons by the Investment Manager.

Read More: Corporate Tax in UAE : All You Need to Know

Ervee is a CPA with international experience in Tax and Accounting. He has over 12 years of experience in accounting and bookkeeping and over a year in VAT implementation, registration, and accounting in UAE. He regularly drives out inefficiencies in company operations and loves the challenge of helping clients find additional ways for an easier and improved compliance and verification of transactions.