The UAE has released regulations outlining the process of transitioning assets in preparation for the implementation of the country’s new corporate tax legislation. These guidelines clarify the treatment of real estate assets for tax purposes and offer instructions for companies to accurately present their balance sheets when selling liabilities.
The newly issued rulings offer real estate sellers flexibility and guidance on how to manage asset presentation during property and share transactions following the introduction of the UAE’s corporate tax regime, according to Arabian Business. Ministerial Decision No (120) of 2023 on Transitional Rules for Corporate Tax, issued by the UAE Ministry of Finance, provides comprehensive guidelines for adjusting the opening balance sheet of taxable entities 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 recently issued decision pertains to specific assets and liabilities, including immovable property, intangible assets, financial assets, and financial liabilities, held by businesses prior to the implementation of the Corporate Tax Law. It allows businesses to modify the tax treatment of these assets and liabilities based on specified rules, which must be decided upon during their initial Tax Return submission.
Once chosen, the tax treatment selection is generally permanent, unless there are exceptional circumstances. The decision also takes into account the ownership history of assets and liabilities, including those owned by the company or other entities within the same business group.
For the real estate sector, additional flexibility is provided. Companies with immovable property recorded on a historical cost basis have the option to choose the basis of relief, either through a time apportionment method or valuation method. This allows groups to determine the most favorable outcome on an asset-by-asset basis, providing greater adaptability for the real estate industry.
After the law takes effect and the company sells the property, it has two options for adjusting its Taxable Income:
- The company can exclude a portion of the gain based on the property’s holding period.
Alternatively, it can utilize a fixed formula determined by the relevant government entities responsible for valuing land and real estate in the UAE. This formula is based on the property’s value at the beginning of the first tax period. - This approach ensures a fair calculation of taxes, taking into account the property’s ownership history or its value, and only taxing the gains attributed to periods following the enactment of the Corporate Tax Law.
In another scenario involving financial assets and liabilities, let’s consider a local business that holds shares in another company, recorded at a historical cost, before the Corporate Tax Law’s implementation.
When the local business sells these shares after the law takes effect, it can adjust its Taxable Income by excluding a portion of the gain based on the shares’ value at the beginning of the first tax period.
This transitional rule ensures that only the gains attributed to periods after the Corporate Tax Law’s effectiveness are subject to taxation for these shares.
For detailed information, all relevant Cabinet Decisions, Ministerial Decisions, and guidelines related to the Corporate Tax Law can be accessed on the Ministry of Finance’s website: www.mof.gov.ae.
