Corporate Tax - CTP009 - Transitional Rules for Qualifying Immovable Property
Corporate Tax - CTP009 - Transitional Rules for Qualifying Immovable Property
The FTA has issued Public Clarification CTP009 to explain the transitional rules under Ministerial Decision No. 120 of 2023, ensuring fair tax treatment for gains on immovable property held before the introduction of UAE Corporate Tax. This is particularly relevant for real estate developers in UAE.
Transitional adjustments apply to immovable property held before the first tax period, including:
Step 1: Initial Gain Calculation: Determine the excluded gain for each Qualifying Immovable Property by subtracting the higher of the original cost or net book value from the market value (adjusted if necessary) as of the start of the first Tax Period.
Step 2: Revenue-Based Apportionment: Apportion the excluded gain across relevant Tax Periods based on revenue recognition principles under applicable accounting standards (e.g., percentage of completion under IFRS 15).
Step 3: Profit Attribution: Identify the portion of accounting profits attributable to the Qualifying Immovable Property on a fair and reasonable basis. Note: If this results in an accounting loss, no adjustment is allowed for that Tax Period.
Step 4: Adjustment Application: Offset the apportioned excluded gain against the attributable accounting profits for each Tax Period. Any excess excluded gain not utilized is forfeited and cannot be carried forward.
The valuations must be conducted by accredited valuers or government authorities, excluding sold or retained units.
CTP009 offers clarity and promotes fairness by excluding pre-tax gains and aligning tax treatment with accounting standards. Real estate developers, in particular, should assess their portfolios, obtain certified valuations, and ensure readiness for compliance.
Below are some practical considerations in light of this public clarification:
If you would like to understand how the above clarification may impact your business, please feel free to reach out to our Tax experts for further guidance.
I. Scope of Qualifying Immovable Property
Transitional adjustments apply to immovable property held before the first tax period, including:
- Land acquired pre-tax period with construction starting post-tax period.
- Projects under construction spanning pre- and post-tax periods.
- Completed projects held for sale post-tax period.
II. Application of Valuation Method – Key Steps
Step 1: Initial Gain Calculation: Determine the excluded gain for each Qualifying Immovable Property by subtracting the higher of the original cost or net book value from the market value (adjusted if necessary) as of the start of the first Tax Period.Step 2: Revenue-Based Apportionment: Apportion the excluded gain across relevant Tax Periods based on revenue recognition principles under applicable accounting standards (e.g., percentage of completion under IFRS 15).
Step 3: Profit Attribution: Identify the portion of accounting profits attributable to the Qualifying Immovable Property on a fair and reasonable basis. Note: If this results in an accounting loss, no adjustment is allowed for that Tax Period.
Step 4: Adjustment Application: Offset the apportioned excluded gain against the attributable accounting profits for each Tax Period. Any excess excluded gain not utilized is forfeited and cannot be carried forward.
The valuations must be conducted by accredited valuers or government authorities, excluding sold or retained units.
BDO UAE Insights
CTP009 offers clarity and promotes fairness by excluding pre-tax gains and aligning tax treatment with accounting standards. Real estate developers, in particular, should assess their portfolios, obtain certified valuations, and ensure readiness for compliance.Below are some practical considerations in light of this public clarification:
- Developers should ensure alignment with IFRS 15 and prepare supporting documentation ahead of filing.
- The valuation method elected in the first Corporate Tax return is irrevocable, barring exceptional FTA-approved cases.
- Early filers may face challenges if their approach contradicts the clarification or if valuations and related calculations were not properly prepared.
- The Clarification is silent on its application to Joint-Development Arrangements.
If you would like to understand how the above clarification may impact your business, please feel free to reach out to our Tax experts for further guidance.