The UAE has issued rules governing transitioning of assets ahead of the country’s new corporate tax laws.
The decision provides guidance on whether real estate assets will be considered for taxable purposes and how companies can provide an accurate balance sheet when selling liabilities.
The new rulings give real estate sellers flexibility and guidance about how to present assets when selling property and shares following the introduction of UAE Corporate tax.
UAE corporate tax and real estate
The UAE Ministry of Finance has issued Ministerial Decision No (120) of 2023 on Transitional Rules for Corporate Tax, providing guidelines for adjusting a taxable person’s opening balance sheet under the Corporate Tax Law.
Younis Haji Al Khouri, Undersecretary of the Ministry of Finance, said: “Transitional rules for Corporate Tax provide important clarifications for businesses that need to transition smoothly from the pre-implementation period of the Corporate Tax Law to the post implementation period.
“The aim is to ease the process of determining the opening balance sheet, ensuring a fair and transparent approach for assets and liabilities held prior to the implementation of the new Corporate Tax regime.”
The decision applies to certain assets and liabilities, such as immovable property, intangible assets, financial assets, and financial liabilities, held by businesses before the Corporate Tax Law comes into effect.
Businesses can adjust their tax treatment of such assets and liabilities based on specific rules and must decide how to do that when they submit their first Tax Return.
Their choice would be permanent except in special circumstances. The decision also considers the ownership history of assets and liabilities, including those owned by the company or other members of the same business group.
There is further flexibility for the real estate sector where companies with immovable property recorded on a historical cost basis have an option to select the basis of the relief, using either a time apportionment method or valuation method, thereby allowing groups to determine the most favourable outcome for them on immovable property on an asset-by-asset basis.
For example, consider a UAE company that owns a real property asset, such as a building or land, before the effective date of the Corporate Tax Law.
Upon selling the property after the enactment of the law, the company can choose one of two methods for adjusting their Taxable Income:
- They can exclude a portion of the gain based on the property’s holding period
- They can use a fixed formula based on the property’s value (as determined by the relevant government entities in charge of valuation of land and real-estate property in the UAE) at the start of the first tax period
This ensures a fair tax calculation that considers the property’s ownership or value history and only taxes that business’ gains on such immovable property that are attributed to periods after the Corporate Tax Law is effective.
Another possible scenario for financial assets and liabilities would be a local business that holds shares in another company recorded on a historical cost basis before the enactment of the Corporate Tax Law.
When this local business sells these shares after the law comes into effect, it can adjust its Taxable Income by excluding a portion of the gain based on the shares’ value at the start of the first tax period.
This transitional rule ensures only gains of that business on such shares that are attributed to periods after the Corporate Tax Law is effective are taxed.
All Cabinet Decisions and Ministerial Decisions and guidelines relating to the Corporate Tax Law are available on the Ministry of Finance’s website: www.mof.gov.ae.