UAE Ministry of Finance issues decision on transitional rules for corporate tax

The objective is to make calculating the starting balance sheet easier while assuring a fair and transparent process.

ABU DHABI - A Taxable Person's opening balance sheet under the Corporate Tax Law may be adjusted in accordance with the Ministerial Decision No. 120 of 2023 on Transitional Rules for Corporate Tax, which was released by the Ministry of Finance.

"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," said Younis Haji Al Khouri, Undersecretary of the Ministry of Finance.

In order to ensure a fair and transparent approach for assets and liabilities held prior to the adoption of the new Corporate Tax regime, the goal is to simplify the process of determining the initial balance sheet.

The ruling is applicable to specific assets and liabilities that firms owned before to the effective date of the Corporate Tax Law, including tangible property, intangible assets, financial assets, and financial liabilities.

Businesses must decide how to accomplish this when submitting their first Tax Return since they can modify the tax treatment of such assets and liabilities in accordance with certain laws. Their decision would be final, excepting unusual circumstances. Assets and liabilities owned by the company or other members of the same business group are also considered.

The real estate sector has additional flexibility because businesses that record their immovable property on a historical cost basis can choose the basis of the relief they receive using either a time apportionment method or a valuation method. This gives groups the freedom to choose the relief that will benefit them the most on an asset-by-asset basis.

Take the case of a UAE firm that owned a real estate asset, such as a building or piece of land, before the Corporate Tax Law went into effect. When the property is sold after the law is in effect, the company has two options for adjusting their Taxable Income: they can either use a fixed formula based on the property's value at the beginning of the first Tax Period (as determined by the relevant government entities responsible for valuing land and real estate property in the UAE) or they can choose to exclude a portion of the gain based on the holding period.

This guarantees a just tax calculation that takes the property's ownership or value history into account and only taxes the company's gains on such movable property that are attributable to periods after the Corporate Tax Law is enacted.

A local business with shares in another company recorded on a historical cost basis before introducing the Corporate Tax Law would be another scenario for financial assets and liabilities.

This neighborhood business may modify its Taxable Income by removing a portion of the gain based on the share's value at the beginning of the first Tax Period when it sells these shares after the law takes effect. Due to this transitory rule, only gains made by the company on these shares that can be linked to times after the Corporate Tax Law goes into force will be subject to taxation.