The introduction of Corporate Tax in the UAE, regulated by Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, has created the need for transitional provisions. To ensure fair tax treatment of assets and liabilities existing before the implementation of Corporate Tax, Transitional Rules under Ministerial Decision No.120 of 2023 provide clear guidance for businesses. These rules are particularly relevant to real estate developers, where revenue recognition often extends over long construction periods.
This article examines the valuation method under the transitional rules, as clarified in Public Clarification CTP009, and explains its application to qualifying immovable properties.
Scope of Transitional Rules
The transitional rules apply to Qualifying Immovable Property (QIP), which includes immovable properties owned before the first Tax Period that are measured on a historical cost basis and later disposed of (or deemed disposed of) for an amount exceeding their net book value.
For real estate developers, Qualifying Immovable Property may include:
- Land parcels acquired before the first Tax Period.
- Properties under construction where work began before the first Tax Period and continued afterwards.
- Fully constructed projects existing before the Tax Period but sold after it.
Notably, if an element of a project did not exist before the first Tax Period, it will not qualify for transitional adjustments.
Disposal and Deemed Disposal
The concept of “disposal” or “deemed disposal” follows accounting standards (IFRS or IFRS for SMEs). Revenue recognition under IFRS 15 — typically based on the percentage of completion method — constitutes a disposal event. Accordingly, disposals for Corporate Tax purposes align with the recognition of revenue and related costs in financial statements.
The Valuation Method
he valuation method allows a taxpayer to exclude part of the gain attributable to the pre-Corporate Tax ownership period. The excluded gain is calculated as:
Market Value at the start of the first Tax Period – higher of (Original Cost or Net Book Value).
- Market Value: Determined by the competent government authority or accredited valuers.
- Original Cost and Net Book Value: Must be specific to the qualifying property and consistent with opening balance sheet records.
- Adjustments must be made if Market Value includes portions already disposed of, retained by the developer, or not qualifying as immovable property.
Methodology for Applying the Valuation Method
The calculation involves four key steps:
- Calculate the overall excluded gain for each QIP by deducting the higher of original cost or net book value from the Market Value.
- Apportion the excluded gain across Tax Periods based on revenue recognition (e.g., percentage of completion).
- Determine the attributed accounting profits related to the QIP. The adjustment is available only if profits are recognised (not losses).
- Apply the excluded gain to reduce taxable accounting profits. Any excess excluded gain cannot be carried forward.
Election to Apply Transitional Rules
- The election to apply the valuation method must be made with the first Tax Return.
- It applies to each Qualifying Immovable Property separately, whether an entire project or specific units.
- Once chosen, the election is irrevocable, unless exceptional approval is obtained from the Federal Tax Authority (FTA).
Conclusion
Ministerial Decision No. 120 of 2023 provides essential transitional relief to ensure fair taxation of real estate projects that straddle the introduction of Corporate Tax in the UAE. By applying the valuation method, developers can exclude gains linked to pre-tax periods, aligning taxable income more closely with actual post-tax economic activity.
Real estate developers should carefully evaluate their qualifying assets, maintain robust valuation documentation, and ensure consistency with financial reporting standards to fully benefit from the transitional rules.
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