In recent years, the United Arab Emirates (UAE) has made strategic amendments to its Value Added Tax (VAT) laws to bolster its financial landscape and attract investors. With the introduction of VAT in 2018, the UAE established a tax framework intended to enhance revenue collection and align with global standards. This VAT system, however, added a layer of cost to various financial services, including investment fund management. To address this, the UAE Cabinet recently announced a VAT exemption for investment fund management services, effective November 2024, which is a significant step toward fostering growth in this sector.

The VAT exemption applies specifically to fund management services for funds incorporated within the UAE, as part of the country’s effort to solidify its position as a global financial hub. This update is expected to make the UAE’s financial sector more competitive by reducing operational costs for fund managers, which in turn may benefit institutional and retail investors alike​

What the VAT Exemption Covers

The VAT exemption encompasses a range of services associated with fund management. These include activities like portfolio management, pension fund management, fund performance monitoring, and other operational aspects that require specialized expertise. Importantly, this exemption only applies to UAE-incorporated funds, meaning funds must be established and licensed within the UAE to qualify.

Previously, a standard 5% VAT was levied on these fund management services, adding to the cost for both fund managers and investors. With this recent change, the UAE government aims to create a more appealing environment for investment by offering fund management without VAT. This exemption allows fund managers to pass on cost savings to clients, potentially increasing fund attractiveness and competitiveness on a global scale​.

Benefits of VAT Exemption for the UAE’s Investment Landscape

The VAT exemption provides several advantages that are expected to enhance the UAE’s investment landscape:

1. Cost Reduction for Fund Managers: With the elimination of VAT on fund management services, the overall cost of managing funds decreases. This benefit is particularly appealing to institutional investors, who handle large volumes of capital and are highly sensitive to operational costs. As a result, fund managers can deliver cost-effective services to investors, creating a favorable environment for larger-scale investments.
2. Attracting Local and International Investors: By reducing fund management costs, the VAT exemption makes the UAE a more attractive destination for both domestic and international investors. The exemption aligns with the UAE's strategic goal of becoming a leading financial center and encourages investors to establish funds locally, thus fueling the growth of the domestic financial market.
3. Supporting the UAE’s Vision for Financial Sector Expansion: The VAT exemption for UAE-incorporated funds underscores the UAE’s long-term vision of economic diversification and expansion of the financial sector. This move aligns with the government’s strategy to increase foreign direct investment and improve the overall ease of doing business within the UAE.
4. Encouraging Local Fund Establishment: Limiting the VAT exemption to UAE-incorporated funds is a strategic decision. It incentivizes investors and fund managers to establish their funds within the UAE rather than in other low-tax jurisdictions. This requirement for local incorporation supports the UAE’s ambition to become a thriving financial hub and keeps both capital and talent within the country​.

Eligibility and Licensing Requirements for Exemption

To qualify for the VAT exemption, funds must be licensed by a recognized UAE authority, such as the Dubai International Financial Centre (DIFC) or Abu Dhabi Global Market (ADGM). Additionally, fund management services must be provided by a licensed fund manager who complies with local regulatory standards.

The licensing requirement plays a crucial role in ensuring that only qualified, UAE-incorporated funds benefit from the exemption, further promoting the establishment of high-standard investment funds within the UAE. This regulatory structure ensures that fund managers are well-equipped to deliver transparent and compliant services, enhancing investor confidence​.

Impact of VAT Exemption on Investors and Fund Managers

The VAT exemption promises significant benefits for both investors and fund managers:

• Cost Savings for Investors: By eliminating VAT on management fees, the UAE government allows fund managers to offer services without passing on VAT-related expenses to investors. This change can make UAE-incorporated funds more affordable, especially for large institutional investors, further enhancing the UAE’s appeal as an investment hub.
• Increased Flexibility for Fund Managers: With reduced VAT costs, fund managers may adjust their fee structures, potentially offering more competitive pricing to attract clients. The exemption also allows fund managers to streamline operations without the added administrative burden of managing VAT on fund management services, providing a more efficient service to investors

Conclusion

The UAE’s VAT exemption for investment fund management services is a strategic measure that enhances the country’s financial landscape, providing fund managers with cost advantages while attracting both local and international investors. By eliminating VAT on locally incorporated funds, the UAE not only reduces operational costs for fund managers but also promotes a competitive investment environment that aligns with international standards.

For investors and fund managers looking to capitalize on this new exemption, consulting with tax advisors can provide essential guidance on structuring investments to maximize benefits. At Finanshels, our tax experts are available to help you understand these regulations and navigate the tax landscape, ensuring you make the most of the UAE’s advantageous financial environment. Contact Finanshels’ tax advisors to learn how your fund can fully benefit from these VAT exemptions and enhance your investment strategies within the UAE.