Transitional Rules- UAE Corporate Tax Update

The update regarding UAE Corporate Tax’s Transitional Rules lists the various adjustments that need to be made to the Taxable Income of a Taxable Person with regard to losses or gains incurred on various assets and liabilities. One must be aware of these adjustments while preparing the financial statements for the relevant Tax Period as the UA Corporate Tax gets affected.

Definitions- Article 1

• Accounting Standards: By accounting standards, we mean those that have been officially issued in a decision made by the Minister of Corporate Tax Law.
• Financial Statements: These cover a wide range of reports that the Taxable Person prepares in consonance with the Accounting Standards.
• Immovable Property: According to the definition given in a Cabinet resolution as per the Corporate Tax Law, this term refers to immovable property.
• Qualifying Immovable Property: This term refers to immovable property that satisfies the requirements in this Decision’s Article (2), Clause (1).
  • An intangible asset fits the description given to it in the accounting standards that the taxable person adopted.
  • A qualifying intangible asset conforms to the requirements set out in Clause (1) of Article (3) of this Decision.
• Financial Asset: A valuable financial instrument as defined by the Accounting Standards put into practice by the Taxable Person.
• Financial Liability: A debt that must be paid according to the accounting principles used by the tax-exempt organization.
• Qualifying Financial Asset: A financial asset that qualifies if it satisfies the requirements outlined in Clause (1) of Article (4) of this Decision.
• A qualifying financial liability meets the requirements mentioned in Clause (1) of Article (4) of this Decision.

Adjustments to Taxable Income relating to gains on Immovable Property acquired before Taxable Person’s first Tax Period- Article 2

1. A Taxable Person can elect to adjust their Taxable Income when computing gains related to an immovable property in case they meet the following requirements:

• The Immovable Property must have been owned before the beginning of the Taxable Person’s first Tax Period.
• The Immovable Property shall be valued on a historical cost basis in the financial statements.
• The immovable property is either disposed of or deemed to be disposed of during or after the first tax period, in case of a value that exceeds its net book value.

2. Exclusion of gain on immovable property: In case Clause (1) is applicable, when a Qualifying Immovable Property is sold or transferred, the Taxable Person is required to make any one of the following adjustments for each Qualifying Immovable Property:

• The gain that would have been realized if the qualifying immovable property had been sold for its market value at the start of the first tax period should be excluded by the taxable person. The cost of the immovable property that should be taken into account for this computation is the cost that is higher between the original cost and the net book value; or,
• The Taxable Person may disregard the gain that was determined by this Article’s Clause (4) for the Qualifying Immovable Property.

3. Market Value of the Qualifying Immovable Property is to be determined by the relevant competent government authority of UAE.
4. Guidelines for calculating the excluded amount of gain are provided in Clause (2)(b) of this Article, which should be revised as follows:

• Step 1: Calculate the gain on the disposal of the Qualifying Immovable Property, had it been transferred at the higher of its initial cost or net book value at the beginning of the first Tax Period.
• Step 2: Divide the total number of days the immovable property was owned by the Taxable Person before the first Tax Period, by the total number of days the Immovable Property was held by the Taxable Person.
• Step 3: Multiply the sum determined in Step (1) with the amount calculated in Step (2).
• Step 4: The amount that results from Step (3) is the gain on the Qualifying Immovable Property that is to be excluded from the Taxable Income for the applicable Tax Period.

5. The election outlined in Clause (1) of this Article must be made for each Qualifying Immovable Property when submitting the first Tax Return in the format and manner specified by the Authority. The election shall be deemed irrevocable except in extraordinary situations and on approval from the Authority.

Adjustments to Taxable Income Relating to Gains on Intangible Assets earned prior to the first Tax Period- Article 3

1. A Taxable Person may adjust their Taxable Income by the provisions outlined in Article 20(2)(i) and Article 61(1) of the Corporate Tax Law to determine gains on all its Intangible Assets. The Intangible Assets must meet the following requirements to be eligible for these adjustments:

• The Intangible Assets were owned before the first Tax Period started.
• The value of the Intangible Assets are reported in the financial statements on a historical-cost basis.
• The Immovable Property is either disposed of or deemed to be disposed of during or after the first tax period, in case of a value that exceeds its net book value.

2. The Taxable Person is required to deduct the gain realized on the sale of the Qualifying Intangible Asset, which is determined by the rules described in Clause (3) of this Article if the circumstances outlined in Clause (1) of this Article are satisfied.
3. The amount of gain to be excluded from the Taxable Income must be determined by the following formula:

• Step 1: Calculate the gain on the disposal of the Qualifying Intangible Asset, had it been transferred at its initial cost or net book value, whichever is higher, at the beginning of the first Tax Period.
• Step 2: Divide the total number of days the Intangible Asset was owned by the Taxable Person before the first Tax Period, by the total number of days the Intangible Asset was held by the Taxable Person.
  • Note: The holding period for such Intangible Asset, before the first Tax Period, cannot exceed 10 years, except under exceptional circumstances and with the approval of the Authority.
• Step 3: Multiply the sum determined in Step (1) with the amount calculated in Step (2).
• Step 4: The amount that results from Step (3) is the gain on the Qualifying Intangible Asset that is to be excluded from the Taxable Income for the applicable Tax Period.

4. The election outlined in Clause (1) of this Article must be made for each Qualifying Intangible Asset when submitting the first Tax Return in the format and manner specified by the Authority. The election shall be deemed irrevocable except in extraordinary situations and on approval from the Authority.

Adjustments to Taxable Income for Losses and Gains on Financial Assets and Financial Liabilities Owned Before the First Tax Period- Article 4

1. A Taxable Person can elect to adjust their Taxable Income as per Article 20(2) and Article 61(1) of the Corporate Tax Law to determine gains and losses on financial assets and financial liabilities that meet the following criteria:

• Financial liabilities or assets must have been acquired before the beginning of the first tax period.
• The value of the Financial Assets or Financial Liabilities are reported in the financial statements on a historical-cost basis.

2. Where this Article’s Clause (1) applies, the Taxable Person shall exclude from the gain or loss at the beginning of the first Tax Period the amount that would have resulted from the sale of the Qualifying Financial Assets or Qualifying Financial Liabilities if they had been sold at market value and the cost of those Assets or Liabilities had been equal to their net book value.
3. The election outlined in Clause (1) of this Article must be made for each Qualifying Financial Assets and Financial Liabilities when submitting the first Tax Return in the format and manner specified by the Authority. The election shall be deemed irrevocable except in extraordinary situations and on approval from the Authority.

Ownership of Immovable Property, Intangible Assets, Financial Assets, and Financial Liabilities within a Qualifying Group or Tax Group- Article 5

1. This Article shall be applicable to Immovable Property, Intangible Assets, Financial Assets, and Financial Liabilities which are solely held by the Taxable Person and one or more of the following people or entities:

• A member who belongs to the same Qualifying Group or Tax Group as the Taxable Person that has  acquired the relevant assets or liabilities as per Article 26(1) and Article 42(1) of the Corporate Tax Law respectively.

2. In the context of this Article:

• Assets that are not financial assets are referred to as “Non-Financial Transferred Assets.”
• “Transferred Assets and Liabilities” shall refer to all of the assets and liabilities listed in this Article’s Clause (1), including Non-Financial Transferred Assets.
• Any transfer that is not covered by Article 26(1) and Article 42(1) of the Corporate Tax Law, or that would not have been covered if the Corporate Tax Law were in operation, is referred to as a “Non-Qualifying Transfer.”

Dissemination and Application of this Decision- Article 6

This Decision shall be published and it will be effective from the date of publication.

FAQs

What prerequisites must be met to adjust Taxable Income for gains on immovable property acquired before the Taxable Person’s first Tax Period? 

In this case, the following criteria must be met to adjust Taxable Income: 

• Immovable property must have been owned before the start of the tax year. 
• Based on historical cost, the immovable property should be valued in Financial Statements. 

• The immovable property must be sold, or be assumed to be sold, for a sum greater than its net book value during or after the first Tax Period. 

How are the market values of the movable property that qualifies for these modifications determined? 

The relevant government responsible authority in the UAE will determine the market value of the qualifying immovable property.