Introduction:
On 26th May 2023, the Ministry of Finance introduced Decision No. 120 of 2023, which outlines the adjustments under the transitional rules for the implementation of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (referred to as the ‘CT Law’). Effective immediately after its publication, this decision provides guidance on how taxable gains or losses attributed to specific assets prior to entering the CT regime should be treated upon their disposal.
Key Highlights:
Here are the key highlights regarding the adjustment of taxable income for gains or losses recognized upon disposal of certain assets:
Immovable Property:
A taxable person can choose to adjust their taxable income for gains upon disposal of “Qualifying Immovable Property” if certain conditions are met.
The conditions include owning the property before the first tax period, accounting for it on a historical cost basis, and disposing of it for a value exceeding the net book value.
Intangible Assets:
Similar to immovable property, a taxable person can adjust their taxable income for gains upon disposal of “Qualifying Intangible Assets” if specific conditions are fulfilled.
The assets must be owned before the first tax period, accounted for on a historical cost basis, and disposed of for a value exceeding the net book value.
The difference is that the number of days the qualifying intangible asset is owned before the first tax period cannot exceed 10 years.
Financial Assets and Liabilities:
A taxable person can adjust their taxable income for gains and losses upon disposal of “Qualifying Financial Assets” and “Qualifying Financial Liabilities” if certain conditions apply.
The conditions include owning the assets or liabilities before the first tax period and accounting for them at their cost at the start of the first tax period.
The gains or losses can be excluded if the assets or liabilities were disposed of at market value.
The options available for adjusting taxable income for these asset types are as follows:
Option 1 (Immovable Property):
Exclude gains by calculating the difference between the market value of the asset at the start of the first tax period and the higher of original cost or net book value at the start of the first tax period.
Option 2 (Immovable Property and Intangible Assets):
Exclude gains based on the formula: (Sales Proceeds at time of disposal) – (Higher of original cost or net book value at the start of the first tax period) multiplied by the number of days the asset is owned before the first tax period, divided by the total number of days the asset is owned.
For Qualifying Financial Assets and Liabilities:
Exclude gains or losses by considering their market value at the time of disposal and their cost at the start of the first tax period.
It’s important to note that these adjustments also apply to assets held by a taxable person within a Qualifying Group or Tax Group.
Key Takeaway:
The transitional rules introduced by the Ministry of Finance aim to facilitate a smooth transition into the CT regime for taxable entities. By allowing adjustments for gains or losses on assets held prior to the implementation of the CT Law, entities can avoid paying taxes on unrealized gains in the future. These adjustments enable the exclusion of pre-CT regime gains from taxation upon the eventual sale of the assets, without creating or increasing any tax losses.
Conclusion:
The issuance of Decision No. 120 of 2023 by the Ministry of Finance provides valuable insights into the adjustments under the transitional rules for corporate taxation in the UAE. Taxable entities now have clear guidelines on how to adjust their taxable income for gains or losses upon the disposal of specific assets. By understanding and implementing these rules effectively, entities can ensure compliance with the CT Law while optimizing their tax liabilities during the transitional period.
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