Tax Alert – Amendments to the investment fund structures

Key amendments to ministerial decisions

The Ministry of Finance has announced significant updates to the existing Cabinet Decision in relation to Qualifying Investment Funds and Qualifying Limited Partnerships, with the release of Cabinet Decision No. 34 of 2025 which has replaced Cabinet Decision No. 81 of 2023.

Below we decipher what this means for Qualifying Investment Funds and Qualifying Limited Partnerships operating in the UAE.

Expansion of scope and eligible entities

Cabinet Decision No. 81 of 2023 (CD 2023) focused primarily on Qualifying Investment Funds (QIFs). Whereas, in contrast, Cabinet Decision No. 34 of 2025 (CD 2025) explicitly includes Real Estate Investment Trusts (REITs), Qualifying Limited Partnerships (QLP), and Unincorporated Partnerships within the scope of entities that may apply for Corporate Tax exemption. This change aligns the UAE with international standards and widens the tax-neutral structures available to investors.

Conditions for qualifying investment funds

Article (2) of both CD 2023 and CD 2025 sets out the conditions under which an investment fund may qualify for Corporate Tax exemption as a Qualifying Investment Fund (QIF). While the overall framework remains consistent across both decisions, there are several nuanced differences in implementation and compliance expectations. In CD 2023, the conditions included: the fund's primary engagement in Investment Business, investor ownership thresholds (no more than 30% for fewer than 10 investors, and 50% for 10 or more), a requirement that the fund be managed by an Investment Manager with at least three professionals, and a restriction on investor control over day-to-day operations.

In addition, income from Investment Managers was attributable to their own taxable income, and non-core activities were capped at 5% of total revenue. Notably, CD 2023 included a grace period of two financial years for newly established funds to meet ownership conditions, with exempt status revoked from the third year if non-compliance persisted. CD 2025 retains the emphasis on Investment Business and ownership thresholds but introduces subtle refinements. The explicit requirement for an Investment Manager with a specific team size has been removed, potentially to allow more operational flexibility. A new requirement mandates that funds provide investors with all necessary information and documents to calculate their taxable income - signaling a stronger focus on compliance and reporting.

Real estate investment trusts – evolution and expansion

While Article (3) of CD 2023 did establish criteria for REITs to obtain exemption - such as holding AED 100 million in assets and maintaining a 70% real estate ratio – CD 2025 expands and formalizes REIT treatment. Article (4) of CD 2025 introduces new technical definitions, detailed rules on depreciation, profit distribution thresholds, and treatment of disposals. A key addition is the '80% rule': if a REIT distributes 80% or more of its Immovable Property Income within nine months of the financial year-end, investors are not required to adjust their taxable income.

However, if the distribution is not made within this timeline, 80% of the prorated Immovable Property Income must be included in the investor’s taxable income. This mechanism ensures that tax exemption benefits are tied to actual income distribution, reinforcing the purpose of REIT structures as pass-through investment vehicles.

Qualifying limited partnerships – newly introduced

Article (5) of the CD 2025 introduces the concept of a Qualifying Limited Partnership (QLP), a significant addition absent from the CD 2023 framework. A QLP may apply for exemption from Corporate Tax if it conducts only Investment Business and does not derive any income from immovable property located in the UAE, such as rent, sale, or subletting.

Additionally, its primary purpose must not be tax avoidance. Juridical persons wholly owned and controlled by a QLP may also apply for exemption, provided they either undertake the QLP’s activities, hold or invest funds solely for the QLP, or perform only ancillary functions. These supporting entities must also avoid deriving any UAE immovable property income. To maintain its exempt status, the QLP must ensure that any ancillary or incidental business activities do not exceed 5% of its total revenue in any given financial year. This threshold acts as a safeguard to preserve the fund's primary focus on investment operations. 

For investors, CD 2025 offers favorable treatment. A taxable person investing in an exempt QLP may adjust their taxable income to exclude any profit distributions received. If the investor is a juridical person, they must also include their share of net income from the QLP, excluding amounts already taxed through the Investment Manager. Importantly, a QLP that fails to apply for exemption in its first eligible tax period, or fails to continuously meet the qualifying conditions, will lose its exempt status retroactively from the start of the relevant tax period. It will also be barred from reapplying for exemption for the subsequent four tax periods, ensuring strong compliance enforcement.

Investor income from QIF

Article (4) of CD 2023 provided basic conditions for when an investor’s income from a QIF would be included in taxable income - primarily based on ownership thresholds and control. Article (3) of CD 2025 significantly enhances this by setting tiered ownership thresholds based on the number of investors (30% for fewer than 10, 50% for 10 or more – Diversity of Ownership Condition), introducing rules for real estate exposure (e.g., 10% immovable property threshold triggering partial income inclusion), and providing mechanisms for depreciation and profit adjustments.

CD 2025 also introduces administration rules for non-resident investors. If the 'Diversity of Ownership' condition is not met by a juridical investor, it could result in additional tax implications for that investor. However, the exemptions for the QIF and other investors would remain unaffected. Additionally, CD 2025 introduces important refinements to how investor income from a QIF is treated. A key feature is the 80% distribution rule: if a QIF’s UAE immovable property exceeds 10% of its assets, 80% of that income is taxable to investors unless the fund distributes at least 80% of it within nine months of the financial year-end. This encourages timely distribution and prevents funds from sheltering real estate income.

There are also grace period rules specified: ownership thresholds (30% or 50%) do not apply during the fund’s first two financial years. Beyond that, a fund won’t lose exemption status if a threshold breach is brief (not exceeding 90 days) or results from liquidation or events beyond control. Non-resident investors are also given flexibility to comply by appointing a Tax Agent either directly, through the fund, or via the Investment Manager.

Lastly, income timing is clarified by linking prorated Immovable Property Income to the financial year-end or the investor’s holding period, ensuring proper alignment of income recognition and tax obligations.

Anti-avoidance measures and ministerial powers

Unlike CD 2023, the CD 2025 update incorporates explicit anti-avoidance measures. These include loss of exempt status for failing to meet conditions, a four-year reapplication lockout period, and valuation methods for previously exempt assets.

Repeal and transition provision

The new Cabinet Decision shall apply for tax periods beginning on or after 1 January 2025. The earlier Decision shall continue to apply for tax periods that commenced before 1 January 2025.

In the ever-evolving landscape of UAE Corporation Tax, the updated Decisions provide further clarity on the rules and regulations for Funds operating in the UAE.

Please reach out to our team of experts, and together we can understand how you may be impacted by the new changes.