UAE Corporate Tax: Property owners better off after new 4% depreciation rule

Dubai: Long-time investors owning properties in the UAE that they intend to sell at some point need to make some major decisions on the tax front.

That’s because they need to determine whether they want to enter the current market value on those properties in their tax records – or opt for the price they bought at.

And they need to apply this on all their properties for the first ‘tax period’ starting January 1, 2025. (In that case, these property investors need to file these tax returns by September 2026.)

So, whether you are holding a single property or multiple ones, make the decision – apply current value in the tax records or go for the price it was originally bought at.

Even in the case of a property bought for own use, if the owner decides to sell at a later date, he or she must factor for the tax records. In other words, hold it at market value or the original value.

4% annual depreciation on property

This follows the UAE’s recent decision to allow these property investors the benefit of a 4% depreciation each year on all investment properties they hold.  (If the property is recorded at the original bought price, then the owner doesn’t get the benefit of depreciating the asset.)

In effect, this is what the new tax option means for investors – if a property was bought for Dh1 million and now being sold for Dh3 million after 5 years, the investor can depreciate at 4% off the Dh3 million for each of the 5 years – and pay 9% corporate tax at the time of the sale.  

If the investor decides to hold the property at the original value in the tax records and then sells it at a higher price, he needs to pay the 9% corporate tax on the full difference.

“Holding real estate assets at fair value allows them to depreciate properties as per international norms,” said Sameer Lakhani, Managing Director of Global Capital Partners. “

“Investors have the ability to choose whichever is more advantageous for them - provided they declare their option upfront as stipulated by the FTA.

“For example, investors who purchased a 2-bed room townhouse at The Springs back in 2002 did so at Dh400,000 compared to the current Dh3.3 million or higher.

“For investors that held on to these properties, the decision to hold it at original cost or do it at market value is dependent on their intent to sell. What the new UAE rule does is help investors the advantage of depreciating from market value if they have outsized gains – like buying at Dh400,000 and selling at Dh3.3 million.”

What UAE ministry says about property depreciation

The tax depreciation deduction available will be the ‘lower of the tax written down value of the investment property or 4% of the original cost of the investment property’.

This applies to each 12-month tax period during which the investment property is held. It will be available to taxpayers who hold investment properties prior to and/or after the introduction of corporate tax.

“Many of our clients have opted for fair valuation - the choice for market- or ‘fair’ value needs to be made in the first year of assessment,” said Tosif Sheikh, Partner at the consultancy Finexpertiza UAE.

“Investors) having a large property asset base (in the UAE) benefit the most from such an option.  

“In our view, the current corporate tax treatment represents a balanced and equitable approach for taxpayers.

“The allowance of depreciation deductions now enables property investors to benefit from tax relief while continuing to defer tax on unrealised gains until the disposal.”

When to hold a property at original price?

Such a factor comes in when a property was, say, bought for Dh2 million 4 years ago and is currently showing a value of Dh1.6 million. In such circumstances, entering the tax records at the original bought price would make sense from a tax perspective.