Ministry of Finance issues decision on transitional provisions for corporate tax purposes
The Ministry of Finance issued Ministerial Resolution No. (120) of 2023 regarding the transitional provisions of corporate tax, which provides guidance on amending the opening budget of a taxable person in accordance with the Corporate Tax Law.
H.E. Younis Haji Al Khouri, Undersecretary of the Ministry of Finance, said: "The transitional provisions of corporate tax provide important clarifications for businesses that need to move smoothly from the period before the implementation of the Corporate Tax Law to beyond, with the aim of facilitating the process of determining the opening budget, and ensuring a fair and transparent approach with regard to assets and liabilities held before the new system comes into force.
The ministerial decision will apply to certain assets and liabilities, such as immovable property, intangible assets, financial assets, and financial liabilities owned by the business before the entry into force of the corporate tax law system.
A business can modify its tax treatment of such assets and liabilities under specific provisions, and must decide how to do so when filing its first tax return, and its decision is permanent except in special circumstances. The resolution also takes into account the history of ownership of assets and liabilities, including those owned by the company or other members of the same business group.
The decision provides more flexibility for the real estate sector where businesses with immovable property calculated on the basis of historical cost, have the option to determine the basis of the facility, either using the time-splitting method or the valuation method, allowing groups to determine the most favorable outcome for them on immovable property on a asset-by-asset basis. For example, if a company in the UAE owns real estate assets, such as a building or plot of land, before the effective date of the Corporate Tax Law.
If the property is sold after the law is implemented, the company can choose one of two ways to adjust its taxable income: either by excluding part of the gain amount based on the period of holding the property, or by using a fixed formula based on the value of the property (as determined by the government authorities concerned with evaluating the value of land and real estate in the country) at the beginning of the first tax period. This ensures that the business calculates tax fairly, taking into account property ownership or value history, and that tax is calculated only on the amount of gain earned on immovable property during the periods following the entry into force of the Corporate Tax Law.
In another possible example of financial assets and liabilities, if a local company owns shares in another company calculated on the basis of historical cost before the Corporate Tax Law came into force, and that company decides to sell those shares after the law comes into force, it can adjust its taxable income by excluding part of the gain amount based on the value of the shares at the beginning of the first tax period. This transitional provision ensures that taxable income is limited to the company's profits earned from such shares during the periods following the entry into force of the Corporate Tax Act.