Key tax considerations for structuring DIFC and ADGM VC funds

Fawaz Elmalki

Senior Counsel

Luna Shehayeb

Associate

Anuj Kapoor

Partner, Grant Thornton, UAE

The UAE's financial free zones, the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM), are the premier jurisdictions for venture capital fund domiciliation in the MENA region.

The introduction of the UAE Corporate Tax (UAE CT) Regime in June 2023 fundamentally changed VC fund economics. The tax treatment of an investment fund is based on its recognised legal form in accordance with the UAE CT Regime. An investment fund structured as a company or having legal personality shall be subject to UAE CT unless it qualifies as a Qualifying Investment Fund (QIF). The tax treatment of a limited partnership is based on the treatment of the investment fund as an 'Incorporated Partnership' or an 'Unincorporated Partnership'.

With the recent enactment of Cabinet Decision No. 34 of 2025 on Qualifying Investment Funds and Qualifying Limited Partnerships, effective from 27 March 2025 (Decision 34 of 2025), the regulatory landscape has evolved significantly.

This article provides VC fund managers with practical guidance on optimising VC fund structures and positioning funds for successful operations in the UAE's evolving tax environment.

Designing a tax-efficient structure

The viability of a tax-efficient fund structure requires careful integration of commercial and legal features designed to maximise marketability. Fund managers should consider the following key structural elements.

Investor requirements

The structure must accommodate the diverse regulatory, tax, and operational requirements of the fund's target investor base, including pension funds, sovereign wealth funds, family offices, and other investors.

Jurisdictional stability and legal framework

The fund should be established in a jurisdiction with a well-developed and well-tested legal regime that provides certainty and predictability for investors and fund managers alike.

Structural familiarity

The fund vehicle should utilise a legal form that is widely recognised and understood by international and local investors, facilitating efficient due diligence and approvals.

Liquidity and exit mechanisms

The fund documentation should provide flexible disposal mechanisms that accommodate diverse investor exit parameters, including distributions in-kind, repurchase rights, and secondary transfer provisions, while maintaining appropriate restrictions to preserve the fund's tax status and regulatory compliance.

Cost efficiency

The structure should minimise establishment costs, ongoing administration expenses, and tax leakage, thereby maximising net returns to investors.

Regulatory compliance

The fund should be designed to facilitate streamlined compliance with applicable regulatory requirements in the UAE and investors' home jurisdictions, including reporting obligations and know-your-customer procedures.

The failure of a fund manager to properly evaluate and implement these structural features may significantly compromise the fund's attractiveness to investors and its capacity to deliver optimal risk-adjusted investment returns. Accordingly, fund managers should engage experienced legal and tax advisers at the earliest stages of fund formation to ensure that the chosen structure aligns with the fund's investment strategy, target investor base, and operational requirements.

Core legal framework and market practice

Conclusion

The UAE's DIFC and ADGM jurisdictions offer VC funds unprecedented opportunities for tax-efficient structuring through the QIF and QLP exemption regimes. Success requires strategic structure optimisation, proactive compliance, and deep understanding of the interplay between federal tax obligations and free zone benefits.

MENA VC funds that understand these frameworks and establish robust compliance systems will create a solid regulatory foundation. Once this foundation is in place, investment execution excellence will determine success in this evolving landscape.