UAE-Corporate-Tax
One option that businesses have on their legacy assets is to fix their taxable income based on the 'holding period'. For investors holding for long, it comes with advantages. Image Credit: Vijith Pulikkal/Gulf News

Dubai: UAE businesses with considerable property assets on their books are getting a tax ‘break’ as the country moves into its Corporate Tax regime on June 1.

The Ministry of Finance’s newly released ‘transitional rules’ apply across assets held by business, tangible and intangible alike.

This applies to businesses existing assets and represent the ‘opening balance’ in their CT records.

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But those with property investments/holdings will have two good reasons to feel pleased with these rules, which will guide their approach on their ‘opening balance’ in their first tax records in the UAE.

The Ministry of Finance on Friday set out these two points when it comes to such a property (or land) investment held by the taxable entity. On selling the asset after the enactment of the law, the business can choose one of two methods to adjust their taxable income on that sale:

  • They can either exclude a portion of the gain based on the property’s ‘holding period’.
  • Or businesses can use a ‘fixed formula’ based on the property’s value. This has to be determined by government entities in charge of valuation of land and property at the start of the first tax period.

So how does this work in real terms?

Let’s assume a property is bought at Dh2 million by the business entity, which then holds it for a certain number of years. If the property gets valued at Dh2.5 million (by the government entity) at the start of the tax period and the business later finds a buyer for Dh3 million, the effective taxable income is on the difference – i.e., the Dh500,000 secured on the revaluation price and what it sold for. The 9 per cent tax rate then applies on the Dh500,000.)

“The new Cabinet Decision provides clarification on treatment of gain on disposal/ deemed disposal of property, intangible and financial assets and liabilities owned prior to the ‘First Tax Period’.

“A pro-rata approach has been prescribed for such assets. Only the portion of the gain in the tax period in relation to the total hold period needs to be considered.

“The decision also mentions that the value needs to be compared to the market value.

“It is not uncommon for capital-intensive entities holding large numbers of assets to dispose assets from time to time. This matter will affect them the most.

“Necessary documentation, justification and calculations would need to be maintained by such entities when disposal is made.

“Though the CD is silent on loss on disposal, we guess the same treatment may apply.”

- Atik Munshi, Managing Partner, FinExpertiza UAE

A good break for smaller businesses

“For companies that have held assets ‘at cost’ on their balance-sheet can make use of this flexibility provided,” said Sameer Lakhani, Managing Director of Global Capital Partners. “The ‘at cost’ basis is what most SMEs do in their accounting.” (The UAE’s listed companies as per the law need to do their books based on IFRS benchmarks. All of the bigger entities have already switched to the latest accounting practices.)

That’s not the only choice businesses have on listing their assets for the tax coverage.

Let’s assume the business sells a property for Dh1.6 million after buying it for Dh1 billion 15 years ago. And where the property is valued at Dh1.5 million.

This is where the length of the holding period comes in. If the business decides not to take the revalue price, the profit on the deal is Dh600,000, as the original price was Dh1 million.

The corporate tax obligation on the Dh600,000 is thus tied to the number of years the property is held by the company. At 15 years, the effective taxable income comes to Dh40,000.

“For the long-term business investor, this works out to quite the opportunity,” said Lakhani.

So, which option should businesses take on their legacy assets in their CT opening balances?

“That depends on the holding period of the asset - and the difference between cost and market value,” said Lakhani.

What businesses must keep in mind on ‘Transitional Rules’
UAE businesses can adjust the tax treatment of their assets and liabilities based on specific rules.

They must decide how to do that when they submit their first tax return.

The choice would be permanent except in special circumstances.
The decision also considers the ownership history of assets and liabilities, including those owned by the company or other members of the same business group.