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UAE Ministry of Finance issues a ministerial decision on transitional rules of corporate tax

The UAE has introduced regulations concerning the transfer of assets in preparation for the implementation of new corporate tax laws. These guidelines address the taxability of real estate assets and provide instructions for companies on accurately presenting their balance sheets when selling liabilities. The new rulings offer real estate sellers flexibility and guidance on how to present assets when selling property and shares following the introduction of corporate tax in the UAE.

The UAE Ministry of Finance has issued Ministerial Decision No (120) of 2023 on Transitional Rules for Corporate Tax, which outlines the procedures for adjusting the opening balance sheet of taxable individuals under the Corporate Tax Law. Younis Haji Al Khouri, the Undersecretary of the Ministry of Finance, stated that these transitional rules aim to facilitate the smooth transition from the pre-implementation period to the post-implementation period of the Corporate Tax Law, ensuring fairness and transparency in the treatment of assets and liabilities held prior to the new tax regime.

The decision applies to specific assets and liabilities, such as immovable property, intangible assets, financial assets, and financial liabilities, held by businesses before the implementation of the Corporate Tax Law. Businesses can adjust their tax treatment of these assets and liabilities based on specific rules and must make this determination when submitting their first Tax Return. This choice is generally permanent unless there are special circumstances. The decision also takes into account the ownership history of assets and liabilities, including those owned by the company or other members of the same business group.

In the real estate sector, there is additional flexibility for companies that have recorded immovable property on a historical cost basis. They have the option to choose the basis of relief using either a time apportionment method or a valuation method. This allows groups to determine the most favorable outcome for each immovable property asset.

For instance, let's 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. When selling the property after the law's enactment, the company can choose one of two methods to adjust their taxable income:

1. Exclude a portion of the gain based on the property's holding period.

2. Use a fixed formula based on the property's value at the start of the first tax period, as determined by relevant government entities responsible for land and real estate valuation in the UAE.

This ensures a fair tax calculation that considers the property's ownership or value history and only taxes the gains attributed to periods after the Corporate Tax Law takes effect.

Another example pertains to financial assets and liabilities. Suppose a local business holds shares in another company recorded on a historical cost basis before the enactment of the Corporate Tax Law. When selling these shares after the law comes into effect, the local business 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 that only gains attributed to periods after the Corporate Tax Law's effectiveness are subject to taxation for that business.

SOURCE: Arabian Business

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