UAE corporate tax: MoF issues transitional rules for businesses

The UAE’s Ministry of Finance (MoF) has issued a decision detailing new guidelines for adjusting a taxable person’s opening balance sheet under the corporate tax law, which comes into effect on June 1.

The aim of Ministerial Decision No  120 of 2023 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, said Younis Haji Al Khouri, Undersecretary of the MoF. “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 decision applies to certain assets and liabilities, such as immovable property, intangible assets, financial assets, and financial liabilities, held by businesses before the corporate tax law comes into effect, stated a report published by state news agency WAM.

Businesses can adjust their tax treatment of such assets and liabilities based on specific rules and must decide how to do that when they submit their first tax return. Their choice would be permanent except in special circumstances.

The decision looks at ownership history of assets and liabilities, including those owned by the company or other members of the same business group.

Corporate tax: transitional rules for property assets explained

There is further flexibility for the real estate sector where companies with immovable property recorded on a historical cost basis have an option to select the basis of the relief, using either a time apportionment method or valuation method, thereby allowing groups to determine the most favourable outcome for them on immovable property on an asset-by-asset basis.

For example, consider a UAE company that owns a real property asset, such as a building or land, before the effective date of the corporate tax law.

Upon selling the property after the enactment of the law, the company can choose one of two methods for adjusting their taxable income; they can either exclude a portion of the gain based on the property’s holding period, or they can use a fixed formula based on the property’s value (as determined by the relevant government entities in charge of valuation of land and real-estate property in the UAE) at the start of the first tax period, WAM reported.

This ensures a fair tax calculation that considers the property’s ownership or value history and only taxes that business’ gains on such immovable property that are attributed to periods after the corporate tax law is effective.

Another possible scenario for financial assets and liabilities would be a local business that holds shares in another company recorded on a historical cost basis before the enactment of the corporate tax law.

When this local business sells these shares after the law comes into effect, it can adjust its taxable income by excluding a portion of the gain based on the shares’ value at the start of the first tax period. This transitional rule ensures only gains of that business on such shares that are attributed to periods after the corporate tax law is effective are taxed.

In recent news, the MoF recently announced three new ministerial decisions for the purposes of Federal Decree-Law No 47 of 2022 on the ‘Taxation of Corporations and Businesses’, reported the state news agency, WAM.

Image credit: WAM