UAE Corporate Tax Transition Rules

UAE Corporate Tax Transition Rules

Admin
23 Aug 2024

We all know that Corporate tax is already implemented in the UAE. For any new business from hereon corporate tax is applicable on all the business conducted. However, for existing businesses, they have to be careful about how the transition into corporate tax is done. This will be very relevant for 1st tax return submission.

Existing businesses will have assets & liabilities that are carried into the new tax regime. Businesses must subscribe to the transitional measures provided by the ministry. This will most likely lead to taxable income adjustments.

Bottom Line

Opening Balance Sheet

The closing balance sheet of the financial year before the first tax year will be considered as the opening balance sheet for corporate tax purposes. For example, if your financial year is Jan - Dec, then the balance sheet year ended December 31 2023 will be considered as the opening balance sheet for the first tax year.

An important point to note is that the arms-length principle must be considered for the opening balance sheet. This means that in the example discussed above, you cannot wait till 2024 to ensure arms-length transactions, this must be maintained from 2023.

Taxable Income Adjustments

Below we have discussed what adjustments need to be made on the different assets and liabilities as per the decision of the ministry.

Immovable Property

Conditions -

1. The immovable property is owned prior to the first tax period,

2. The immovable property is measured at a historical cost basis, and

3. The immovable property is disposed of (or deemed to be) during or after the first tax period for the purpose of determining the taxable income for a value exceeding the net book value.

Adjustment Options -

1. Exclude the gain that would have arisen at the start of the first tax period, had the immovable property been disposed of at the market value, and the cost is the higher of original cost or net book value (NBV).

Gain to be Excluded = Market Value - (Higher of original cost or NBV)

2. Exclude the pro-rated portion of the gain that would have arisen on disposal of the immovable property had its cost been higher of the original cost or net book value (NBV). The pro-rated gain is calculated on the basis of the number of days the immovable property was held prior to the first taxable year.

Gain to be Excluded = [ Price - (Higher of Original Cost or NBV) ] x (Number of days asset held before the First tax year) ÷ (Total Number of days asset held)

Additional Considerations-

1. Market Value will be determined by the relevant government competent authority.

2. When filing the first tax return, the election on the taxable income adjustment must be made for each immovable property. This election is irrevocable.

Intangible Asset

Conditions -

1. The intangible asset is owned prior to the first tax period,

2. The intangible asset is measured at historical cost basis, and

3. The intangible asset is disposed of (or deemed to be) during or after the first tax period for the purpose of determining the taxable income for a value exceeding the net book value.

Adjustment Options -

1. Exclude the pro-rated portion of the gain that would have arisen on disposal of the intangible asset had its cost been higher than the original cost or net book value (NBV). The pro-rated gain is calculated on the basis of the number of days the intangible asset was held prior to the first taxable year.

Gain to be Excluded = [ Price - (Higher of Original Cost or NBV) ] x (Number of days asset held before the First tax year) ÷ (Total Number of days asset held)

Additional Considerations-

1. When filing the first tax return, the election on the taxable income adjustment must be made and will be applicable to all immovable property. This election is irrevocable.

2. The life of a qualifying intangible asset shall not exceed 10 years, except under exceptional circumstances & pursuant to approval by the authority.

Financial Assets & Liabilities

Conditions -

1. The Financial Assets or Liabilities are owned prior to the first tax period,

2. The Financial Assets or Liabilities are measured at historical cost basis, and

Adjustment Options -

1. Exclude the gain that would have arisen at the start of the first tax period, had the Financial Assets or Liabilities been disposed of at the market value, and the cost is the net book value (NBV).

Gain to be Excluded = Market Value - NBV

Additional Considerations-

1. When filing the first tax return, the election on the taxable income adjustment must be made and will be applicable to all Financial Assets or Liabilities. This election is irrevocable.

Qualifying Group & Tax Group

We have already discussed earlier what a Qualifying Group and Tax group is. As per the ministerial decision, the adjustment of gain can be made for Immovable Properties, Intangible Assets, Financial Assets, and Financial Liabilities as long as the ownership remains within the qualifying group or tax group since the first tax year.

The conditions, adjustments, and other considerations remain the same as for each asset or liability discussed earlier.

Even when calculating the number of days the assets were held, it will include the days when it was held by other members of the same tax group or qualifying group.

We can see from the above that adjustment rules for each of the discussed assets and liabilities are very similar, with very minor modifications.

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