The UAE Ministry of Finance recently published a decision that is likely to change the taxation of foreign (non-resident) investors and companies in the UAE. This is a new step in addressing non-residents’ tax link (nexus) obligations, particularly concerning qualifying investment funds (QIFs) and Real Estate Investment Trusts (REITs) which triggers taxable nexus concerning corporate taxation in the UAE. The decision replaces Cabinet Decision No 56 of 2023.
What Does the Decision Change or Add?
As with any legislative change, the most recent update focuses on foreign investor taxation and addresses the specifics that define the tax entity threshold.
The designated scope for taxable presence was previously vague; however, this change opens the possibility for a more accurate determination of UAE tax exposure by non-residents engaging with certain investment opportunities within the UAE.
Obligation to Clarify Tax Nexus for Foreign Investors With the new decision, the framework for determining tax liability is straightforward and leaves less room for ambiguity regarding Links for foreign entities or individuals wishing to invest in the UAE without restrictions. Non-resident taxpayers who were uncertain about their tax obligations now have clear instructions.
Effect on QIFs and REITs The most significant shift is with respect to the tax obligations on foreign clients participating in QIFs and REITs. These structures are particularly common for real estate and fund management in the UAE, and the recent decision outlines the exact parameters under which foreign participants in these structures are deemed to have a nexus in the UAE for purposes of corporate tax.
QIFs (Qualifying Investment Funds): Such funds are required to meet specific regulatory and operational requirements. The latest directive states that non-resident participants in QIFs may now incur UAE corporate tax over the degree of their engagement in the fund.
REITs (Real Estate Investment Trusts): Participants in UAE REITs will also be subjected to foreign shareholder status, whereby non-nationals will now have to determine whether such investments create a taxable presence in the UAE borders.
Replacing a Previous Document The newly issued instructions replace Cabinet Decision No 56 of 2023, which primary focused on the criteria for estimating a tax liability nexus for non-residents without offering clear guidance. This decision aligns the tax policies of the UAE with other jurisdictions, reinforcing the idea of equitable treatment to all investors.
Why Should Foreign Investors Care?
As a non-resident investing in the UAE, especially in QIFs or REITs, the recent decision might impact your investment’s tax situation. The guidelines clearly state that some investors will be considered as having a taxable presence in the UAE and will therefore be liable to pay corporate taxes.
In effect, the new changes imply that some foreign investors will now be required to comply with stringent conditions to access the previously enjoyed tax-free status in the UAE. If your activities or level of investment cross certain thresholds, you could be obligated to pay corporate tax.
What Does This Mean for You?
If you are an international investor or foreign company in the UAE, this is the moment to go through the updated rules of taxation, as they bring some clarity to the situation. This helps further clarify:
Whether or not activities conducted within the UAE will trigger a taxable nexus
Whether participation in QIFs or REITs brings one under the purview of the Corporate Tax Law.
Defining the benchmark for relevance for establishing a tax link to the UAE.
Being proactive with compliance ensures that there are no surprises that may lead to potential tax liabilities.
Key Takeaways:
A non-resident of the UAE is considered to have a tax link to the UAE when non-residents’ tax links are established as per the latest decision by the UAE Ministry of Finance.
The updated rules specifically impact the investors of Qualifying Investment Funds (QIFs) and Real Estate Investment Trusts (REITs).
Depending on the foreign investors’ level of investment and activities within these structures, they may now be exposed to corporate tax.
The decision supersedes Cabinet Decision No 56 of 2023, detailing foreign tax liability obligations in clearer terms.
Conclusion: Keep Your Business on the Front Line
The latest decision from the UAE is in fact a remarkable accomplishment towards a more refined and appealing tax system internationally and for competition. For investors outside the region, these changes present new requirements that should be monitored very closely for tax compliance.
If you participate in QIFs, REITS or any other kind of investment into the UAE, a proactive approach will require engaging with the tax experts and understanding the consequences of the new rules.