The Core Shift in Taxation Policy for Investors in In-vestment Funds: from Pass-Through Taxation to Du-al-Layer Exemption

The Previous Regime: Pass-Through Taxation as a Principle

In the earlier system under Decision No. 81, tax policy for investment funds was based on the principle of neutrality between direct and indirect investment. Section 3.2 of the Corporate Tax Guide for Investment Funds and Investment Managers No. CTGIFM1 laid out the rationale: ‘The Corporate Tax Law seeks to ensure neutrality such that investors of an investment fund are in a similar Corporate Tax position as if they had invested directly in the underlying assets of the fund’.

This neutrality was achieved in two ways:

• Unincorporated Partnerships (UPs), by default, were treated as fiscally transparent — their income was taxed in the hands of investors directly.
• For other fund vehicles (typically juridical persons), exemption at the fund level ensured no tax leakage, with investors taxed on a pass-through basis in proportion to their ownership, under Article 20 of the Law.

Thus, under Decision 81, the exemption meant the fund escapes Corporate Tax, but investors remained taxable on their share of fund income — as if the fund were transparent.

The New Regime: Shift to Dual-Layer Exemption

With the adoption of Cabinet Decision No. 34 of 27 March 2025, the concept of neutrality was fundamentally altered. The new structure introduces a significant policy shift — from “transparency and pass-through taxation” to conditional exemption for both fund and investor.

Article 3(1) of this Decision determines that ‘the Taxable Income of a Taxable Person that is an investor in a Qualifying Investment Fund that is exempt from Corporate Tax shall be adjusted to exclude any profit distributions received from the Qualifying Investment Fund’.

This clause reverses the previous rule: investors no longer automatically include fund income unless special conditions are met. Article 3(2) imposes threshold tests for investor-level taxation:

• 30% ownership/control if the fund has <10 investors
• 50% if the fund has 10 or more investors
• If these thresholds are breached, investors must include prorated net income.

Previously, these thresholds applied at the fund level, and failure to meet them would disqualify the fund from being treated as a Qualifying Investment Fund. As a result, all investors would be treated as holding interests in a non-qualifying (opaque) fund, with no access to exemption at the fund or investor level.

Under the new regime, a failure to meet the thresholds no longer affects the exempt status of the fund itself or the pass-through nature of income for all investors. Instead, the consequences are limited to the specific investor who breaches the ownership or control thresholds. That investor is denied the benefit of the investor-level exemption and must include their share of income in taxable income. However, this does not affect their entitlement to apply other exemptions available under the Corporate Tax Law, such as the unconditional exemption for dividends received from resident companies or the Participation Exemption.

Conversely, a qualifying investor who remains below the thresholds may now exempt income received from the fund regardless of the underlying income type. For example, income derived from the sale of shares held by the fund for less than 12 months, which would typically be taxable under general rules, may now be fully exempt at the level of such qualifying investor.

Article 3(5) adds an anti-avoidance rule for real estate-heavy funds: If a fund holds more than 10% of its assets in UAE immovable property, investors must include 80% of their share of property income.

This policy shift is presented in the table:

This signals a clear move away from tax neutrality. Passive investors who:

• Hold less than 30% (or 50%) and
• Lack control, and
• Are not exposed to substantial UAE property via the fund, can now receive fully tax-free returns, even when they would have been taxed under the previous framework.

Real estate income through funds: strategic tax planning under the new regime

One of the most impactful developments under Cabinet Decision No. 34/2025 is the differentiated treatment of UAE real estate income when earned through an exempt investment fund whether structured as a Real Estate Investment Trust (REIT) or a non-REIT Qualifying Investment Fund (QIF).

Under the Corporate Tax Law, income from immovable property located in the UAE, such as rental income, subletting income, and capital gains on disposal, is taxable when earned by a mainland company, regardless of:

• whether the property is commercial or residential, and
• whether it is leased or held for capital appreciation.

Although Free Zone relief is available under certain conditions, it is highly restrictive, requiring that:

• the property be commercial,
• it is located in a Free Zone, and
• the income be earned from another Free Zone Person.

In practice, few real estate projects qualify under these limitations — making fund structuring the key tool for achieving tax neutrality.

Conditions for REIT Exemption

REITs are explicitly addressed under Article 4 of Cabinet Decision No. 34. While they can qualify as exempt funds, their investor-level tax treatment is subject to a mandatory income inclusion rule.

A REIT must meet all of the following:

• Own UAE immovable property assets (excluding land) valued over AED 100 million;
• Either:
  1. be listed with at least 20% of shares floated, or
  2. be wholly owned by two or more unrelated institutional investors;
• Hold at least 70% of its assets in rental-income-generating properties;
• May distribute 80% of property income within 9 months, but only to provide relief in specific cases (see below).

Investor Taxation – no de minimis protection for REIT

Article 4(3) requires all juridical person investors to include 80% of their prorated share of Immovable Property Income in taxable income. This applies regardless of how much real estate is in the REIT’s portfolio there is no 10% materiality threshold reserved by Article 3(5) for Qualifying Investment Funds (QIF), which are not REIT.

Limited Exception for disposing investors

Articles 4(4) and 3(5) provide that if the REIT or non-REIT QIF distribute 80% or more of its immovable property income within 9 months, then an investor who exited before the distribution is not required to include their share of income. In both scenarios there is no relief for investors who continue to hold units even if the 80% distribution is made.

Non-REIT Qualifying Investment Funds (QIFs)

For non-REIT QIFs, Article 3 introduces more flexible investor-level exemption mechanics — including a de minimis rule that REITs do not enjoy.

Article 3(5) provides the 10% threshold advantage: If the fund’s UAE Immovable Property represents 10% or less of its total assets, no income inclusion is required at the investor level even for real estate income.

This allows investors in a diversified fund to receive fully tax-exempt distributions, including from UAE immovable property.

Structural Disadvantage for Unincorporated Partnerships

Ironically, Unincorporated Partnerships, which were previously the natural vehicle for transparency, are now at a disadvantage. Under Article 6(1) of Decision 34 repeats an earlier rule: ‘An Unincorporated Partnership that is treated as a Taxable Person… shall be considered an entity under the definition of a Qualifying Investment Fund’. Hence, a transparent Unincorporated Partnership cannot be treated as an “entity” and therefore doesn’t qualify

This means:

• By default, UPs remain transparent and cannot apply for exemption, since they are not Taxable Persons.
• To benefit from QIF rules, a UP must first apply for fiscal opacity under Article 16(8) of the Corporate Tax Law, and only then apply for QIF exemption.

This creates a two-step compliance burden for Unincorporated Partnerships, in contrast to legal entity funds, which can apply for exemption as a Qualifying Investment Fund directly. Moreover, it introduces a potential risk of a regulatory trap: the FTA may approve the UP’s request to be treated as a Taxable Person (i.e., fiscally opaque) at the first stage, but subsequently deny the application for Qualifying Investment Fund (QIF) status. In such a scenario, the fund and its investors could be left in a less favorable position than they were in under the default transparent treatment, subjecting the fund’s income to Corporate Tax without the benefit of QIF investor exemption.

Implications for Tax Planning and Fund Structuring

The new regime incentivizes:

• The use of opaque, exempt investment funds that shield both the fund and its investors from tax,
• Structuring around the 30% / 50% ownership thresholds to preserve exemption,
• Monitoring UAE property exposure to avoid triggering investor inclusion under Article 3(5) and 4(3).

Fund managers, advisors, and investors should re-evaluate their structures to determine whether they:

• Require an opacity election for UPs,
• Qualify for exemption under the new Article 3 rules,
• Are at risk of breaching the investor inclusion thresholds.

Conclusions

The shift introduced by Cabinet Decision No. 34 of 2025 marks a paradigm change in the UAE’s taxation of investment funds: from pass-through neutrality to strategic tax exemption. While this enhances flexibility for fund managers and offers real tax relief to passive investors, it also demands careful structuring to maintain eligibility, especially for Unincorporated Partnerships and real estate-exposed portfolios.

In practical terms, both non-REIT Qualifying Investment Funds (QIFs) and Real Estate Investment Trusts (REITs) offer structured access to preferential Corporate Tax treatment for income derived from UAE immovable property. Each allows juridical person investors to include only 80% of their prorated share of such income in taxable income effectively providing a 20% exemption. However, a non-REIT QIF offers a distinct advantage where real estate exposure is limited to 10% or less of total assets: in such cases, investors can fully exempt their share of real estate income under Article 3(5), an option not available through REITs. For real estate-heavy strategies, REITs remain a key vehicle to achieve fund-level exemption, though investor-level income inclusion will still apply unless the specific disposal-based relief under Article 4(4) is triggered. Outside these fund structures, direct or indirect real estate ownership typically results in full Corporate Tax exposure unless another statutory exemption applies. Accordingly, both QIFs and REITs serve as essential instruments — each with tailored use cases — for achieving long-term, tax-efficient real estate exposure in the UAE.

The UAE’s approach now balances substance, transparency, and international competitiveness, but not all fund types are equally positioned under this new regime.

The disclaimer

Pursuant to the MoF’s press-release issued on 19 May 2023 “a number of posts circulating on social media and other platforms that are issued by private parties, contain inaccurate and unreliable interpretations and analyses of Corporate Tax”.

The Ministry issued a reminder that official sources of information on Federal Taxes in the UAE are the MoF and FTA only. Therefore, analyses that are not based on official publications by the MoF and FTA, or have not been commissioned by them, are unreliable and may contain misleading interpretations of the law. See the full press release here.

You should factor this in when dealing with this article as well. It is not commissioned by the MoF or FTA. The interpretation, conclusions, proposals, surmises, guesswork, etc., it comprises have the status of the author’s opinion only. Furthermore, it is not legal or tax advice. Like any human job, it may contain inaccuracies and mistakes that I have tried my best to avoid. If you find any inaccuracies or errors, please let me know so that I can make corrections.