Transitional Rules for Corporate Tax
A Comprehensive Guide on Adjusting Income for Unrealised Gains under UAE Ministerial Decision No. 120 of 2023“
The UAE Ministry of Finance has issued Ministerial Decision No. 120 of 2023, providing essential guidelines for businesses on adjusting their taxable income under the Corporate Tax Law. These rules aim to help taxable persons avoid future taxes on unrealized gains in certain assets held at the time of entering the Corporate Tax regime. The decision applies to assets like immovable property, intangible assets, financial assets, and financial liabilities held before the Corporate Tax Law’s implementation.
Types of Qualifying Assets and Liabilities
The Decision allows a Taxable Person to adjust their Taxable Income for gains or losses upon disposal of specific assets, which are categorized as “Qualifying” assets and liabilities.
- Gains upon disposal of “Qualifying” Immovable Property.
- Gains upon disposal of “Qualifying” Intangible Assets.
- Gains and losses upon disposal of “Qualifying” Financial Assets or “Qualifying” Financial Liabilities.
To qualify for adjustments, the Immovable Property and Intangible Assets must meet the following criteria:
- Owned before the first tax period.
- Measured in the Financial Statements on a historical cost basis.
- Disposed of or deemed to be disposed of during or after the first Tax Period for a value exceeding the net book value.
For Financial Assets and Financial Liabilities to be considered “Qualifying,” they must meet conditions (i) and (ii) mentioned above. Taxable Persons have the option to adjust their Taxable Income when calculating gains and losses related to these assets.
Adjustments in relation to above Assets and Liabilities
Qualifying Immovable Property
Upon the disposal of Qualifying Immovable Property, the Taxable Person has two options for making adjustments:
Exclude the gains that would have occurred if you had disposed of the property at the beginning of the first Tax Period. Amount of gain to be excluded is the difference between (1) and (2):
- Market Value of Immovable Property at the start of First Tax Period
- Higher of the Original Cost or Net Book Value (NBV) at the start of First Tax Period or Option 2
The amount of gain to be excluded under this option is as calculated below:
- Subtract the higher value between Original Cost or NBV at the start of the first Tax Period from the Sale Proceeds of the property.
- Divide the number of days the property owned before the first Tax Period by the total days of ownership.
- Multiply the results from (1) and (2) to find the amount of gain to be excluded.
Qualifying Intangible Assets
For Qualifying Intangible Assets, the sole option to adjust gains recognized before the first Tax Period is Option 2, as mentioned earlier for Qualifying Immovable Property. The only difference is that ownership period cannot exceed 10 years before the Tax Period, except under exceptional circumstances and pursuant to approval by the Authority.
Qualifying Financial Assets & Financial Liabilities
A Taxable Person may exclude any gains or losses arising from the disposal of Qualifying Financial Assets and Qualifying Financial Liabilities had such asset or liability been disposed at MV and the cost of these Assets or Liabilities had been equal to the net book value.
Note: It should be noted that such treatment should also be applicable in the event the asset is held by a Taxable Person forming part of a Qualifying Group or Tax Group. When calculating the ownership period for non-financial transferred assets, we need to consider the period of ownership by anyone in the qualifying group, excluding any ownership period before the most recent transfer that does not meet the requirements stated in the Corporate Tax Law.
Conclusion on Transitional Rules for Corporate Tax
The UAE Ministry of Finance’s Ministerial Decision No. 120 of 2023 provides crucial guidelines for taxable persons to adjust their taxable income on the disposal of specific assets under the Corporate Tax Law. By following these rules, businesses can manage their tax liabilities and mitigate the impact of unrealized gains on certain assets held before entering the Corporate Tax regime.