Revenue and expenditure recognition

Under the Accrual Basis of Accounting, Revenue and expenditure are recognised when they are earned or incurred, not necessarily when payments are received or made, or invoices received or sent.

Thus, under the Accrual Basis of Accounting, Revenues and expenses are included in Taxable Income in the Tax Period in which they are earned or incurred. Therefore, when a provider delivers a service to a customer (assuming both use the Accrual Basis of Accounting), and the customer pays the provider later (for example, 2 months after the service is provided), Revenue is earned by the provider and is included in its Taxable Income and the expenditure is incurred by the customer and is included in its Taxable Income when the service is performed, i.e. before any payment is made or received, or invoices received or sent.

Eligibility

For the purposes of Corporate Tax, a Person may prepare Financial Statements using the Cash Basis of Accounting if: ^[14]

• Their Revenue does not exceed AED 3 million within the relevant Tax Period; or

• In exceptional circumstances and pursuant to an application submitted by the Person to the FTA.

If their Revenue does not exceed AED 3 million, the Person can apply the Cash Basis of Accounting without needing to submit an application to the FTA.

Revenue is a defined term in the Corporate Tax Law and means the gross amount of income derived during a Tax Period. Revenue should be determined based on the arm's length principle. When determining the Revenue, the income from all Business Activities undertaken by a particular juridical person must be taken into account, and certain defined Business Activities in the case of a natural person. The Cash Basis of Accounting should be used to determine whether the AED 3 million threshold is exceeded.

Once a Taxable Person's Revenue exceeds AED 3 million in the Tax Period, they must prepare Financial Statements on an accrual basis, except under exceptional circumstances and following the FTA's approval.

Revenue and expenditure recognition

Under the Cash Basis of Accounting, Revenue and expenditure are reported, for Corporate Tax purposes, in the Tax Period in which the amounts are received or paid. The Cash Basis of Accounting applies equally to both Revenue and expenditure recognition. There is no balance sheet under the Cash Basis of Accounting.

A credit sale, for example, is not reported as Revenue by the seller at the time of issuing the invoice, delivering the products or rendering the service. This is because the cash is not received at any of these moments. Under the Cash Basis of Accounting the seller records the Revenue only when they receive the payment.

The Cash Basis of Accounting does not alter the nature of payments. For example, payment for the purchase of an asset, receipt of a loan or repayment of loan principal are not Revenue or expenditure (though the interest element of any payment would be taxable or deductible subject to normal rules) . Nonetheless, under the Cash Basis of Accounting, a deduction may be taken in respect of assets purchased in place of the tax relief which would ordinarily be given for depreciation on the Accrual Basis of Accounting (no depreciation is recorded under the Cash Basis of Accounting) .

Revenue and expenditure are recognised under the Cash Basis of Accounting at the date of receipt or payment. For example, where a customer pays cash for the purchase of a good, the seller should recognise the Revenue on the day of the transaction, and the buyer should recognise the expenditure on the same day, assuming both apply the cash basis.

However, payments can be made other than in cash, for example, credit or debit card payment, cheque payment and in-kind payment. Where the payment is made through one of these methods, the actual cash flow should be considered.

For example, a credit card payment by a buyer will not be considered a cash payment until they settle their credit card bill, while for the seller the receipt of cash, i.e. when their bank account is credited, can be earlier.

A debit card payment would be considered as an immediate payment for the buyer because the cash is directly debited from their bank account.

A cheque payment would be considered a cash payment when the cheque is cashed by the seller and when the cash is blocked or debited from the buyer's bank account.

What are exceptional circumstances?

An example of an exceptional circumstance and a reason to be permitted to use the Cash Basis of Accounting could be where the Taxable Person expects to exceed the AED 3 million threshold for only one Tax Period. ^[15]A Taxable Person should maintain evidence that it had a basis to expect this.

Calculation of the threshold for using Cash Basis of Accounting

In determining whether the Taxable Person's Revenue exceeds the AED 3 million threshold, ^[16]the Revenue is that of the Tax Period in question. Thus, for any given Tax Period, it will only be known with certainty whether the threshold has been exceeded after the end of the Tax Period.

The Cash Basis of Accounting should be used to determine whether the AED 3 million threshold is exceeded (see Section 4.2.1).

Fluctuations in Revenue: switching to/from Accrual Basis of Accounting

During its life cycle, a Taxable Person may face Revenue fluctuations. If Revenue derived during a Tax Period exceeds AED 3 million by applying the Cash Basis of Accounting, the Taxable Person should switch to the Accrual Basis of Accounting since they no longer meet the conditions prescribed under Article 20(5) of the Corporate Tax Law. However, there is potential for this to qualify as an 'exceptional circumstance' for which an application can be made and the FTA may approve or not the continued use of the Cash Basis of Accounting (see Section 4.2.3).

Interaction with Small Business Relief

Businesses that elect for Small Business Relief are able to prepare financial statements based on the Cash Basis of Accounting, if their revenue does not exceed AED 3 million. ^[17]

One of the conditions of Small Business Relief is that Revenue does not exceed AED 3 million, ^[18]where Revenue is the gross amount of income derived during a Tax Period calculated according to applicable accounting standards.

According to Ministerial Decision No. 114 of 2023, the applicable accounting standard is International Financial Reporting Standards ('IFRS') or IFRS for SME's. However, a Person may prepare Financial Statements using the Cash Basis of Accounting, where the Person derives Revenue that does not exceed AED 3 million, as explained in Section 4.2.1.

Accordingly, a Person may apply either IFRS (or IFRS for SMEs) or the Cash Basis of Accounting in order to calculate their Revenue to determine if they are eligible for Small Business Relief. The Cash Basis of Accounting is always used to determine eligibility to prepare Financial Statements on the Cash Basis of Accounting for Corporate Tax purposes. Therefore, if IFRS or IFRS for SMEs is used to determine Revenue for the purpose of Small Business Relief, the cash basis still has to be used with regard to eligibility for the Cash Basis of Accounting.

Fair value accounting

Fair value accounting uses current market values as the basis for recognising the value of certain assets and liabilities in the Financial Statements. The objective is to estimate the price at which a transaction to sell an asset or to transfer a liability would take place between market participants under the market conditions applicable on the measurement date. ^[19]

Impairment

Entities recognise and record the value of their assets in their accounts. The value of an asset is determined by the market and can change as time passes. The core principle is that an asset must not be carried in the Financial Statements of the entity at a value higher than the highest amount that can be recovered through its use or sale. If the carrying amount exceeds the recoverable amount, the asset is described as "impaired" and the entity must reduce the carrying amount to its recoverable amount and recognise an impairment loss. ^[20]

What constitutes realisation?

The realisation of an asset or a liability includes, but is not limited to, the following: ^[22]

• The sale, disposal, transfer (other than non-taxable transfers described below), settlement and complete worthlessness of an asset as per the Accounting Standards used by the Taxable Person.

• The settlement, assignment, transfer (other than non-taxable transfers described below), and forgiveness of a liability as per the Accounting Standards used by the Taxable Person.

On the other hand, certain transfers are not considered a realisation of assets or liabilities. These include: ^[23]

• A non-taxable transfer of assets or liabilities between members of a Qualifying Group (that is not a Tax Group) as defined under Article 26 of the Corporate Tax Law.

• A transfer of assets or liabilities which qualifies for Business Restructuring Relief under Article 27 of the Corporate Tax Law.

Election to use the realisation basis for Taxable Persons other than Banks or Insurance Providers

A Taxable Person, other than a Bank or Insurance Provider, that prepares Financial Statements on an Accrual Basis of Accounting, may elect to take into account gains and losses on a realisation basis in relation to either: ^[24]

• All assets and liabilities that are subject to fair value or impairment accounting under the applicable Accounting Standards; or

• All assets and liabilities held on the capital account at the end of a Tax Period, whilst taking into account any unrealised gain or loss that arises in connection with assets and liabilities held on the revenue account at the end of that period.

Election to use realisation basis for Banks and Insurance Providers

Banks and Insurance Providers that are Taxable Persons and that prepare Financial Statements on an Accrual Basis of Accounting may elect to recognise gains and losses on a realisation basis only in relation to all assets and liabilities held on the capital account at the end of a Tax Period. ^[25]Accordingly, Banks and Insurance Providers are subject to Corporate Tax when using the Accrual Basis of Accounting in respect of any unrealised gain or loss that arises in connection with assets and liabilities held on the revenue account at the end of the Tax Period.

Timeline for making the election to use the realisation basis

The election for the realisation basis must be made by the Taxable Person during the first Tax Period which practically will be at the time of submitting the first Tax Return. ^[26]

Revocation of election to use realisation basis in exceptional circumstances

The election to use the realisation basis is irrevocable. However, it may be revoked under exceptional circumstances and pursuant to approval by the FTA. ^[27]Exceptional circumstances would be assessed by the FTA on a case-by-case basis.

Effect of applying realisation basis to Taxable Income

Taking into account gains and losses on a realisation basis means that unrealised gains and losses recorded in the Taxable Person's Financial Statements would be disregarded for Corporate Tax purposes. This means:

• For assets and liabilities subject to fair value or impairment accounting, all unrealised gains would not be taxable, and all unrealised losses would not be deductible, until both (gains and losses) are realised.

• For assets and liabilities held on capital account, unrealised gains and losses, including unrealised foreign exchange gains and losses, would not be taxable or deductible, respectively, until they are realised. ^[28]

• For assets and liabilities held on revenue account, unrealised gains and losses arising would continue to be taken into account in determining Taxable Income.

A Taxable Person that has elected to use the realisation basis must make certain additional adjustments in respect of the relevant assets and liabilities when calculating the Taxable Income. ^[29]These adjustments include: ^[30]

• In cases other than upon realisation, any depreciation, amortisation or other change in the value of an asset (other than a Financial Asset) should be excluded from the Accounting Income when calculating the Taxable Income to the extent that the adjustment amount relates to a change in net book value exceeding the original cost of that asset.

• In cases other than upon realisation, any change in the value of a liability or a Financial Asset, including amortisation, should be excluded from the Accounting Income when calculating the Taxable Income.

• Upon the realisation of an asset or a liability, any amounts that had not been previously recognised for Corporate Tax purposes (for example, unrealised gains or losses) must be included in the Taxable Income. However, any such amount that arose prior to the most recent acquisition where Business Restructuring Relief or the relief for transfers within a Qualifying Group did not apply should not be included in the Taxable Income.

Definition of capital account

"Assets held on capital account" refers to assets that: ^[31]

• The Person does not trade;

• Are eligible for depreciation; or

• Are treated under applicable Accounting Standards as property, plant and equipment, investment property, intangible assets, or other non-current assets.

"Liabilities held on capital account" refers to liabilities incurred which do not give rise to deductible expenditure for Corporate Tax purposes, ^[32]or liabilities treated under applicable Accounting Standards as non-current liabilities. ^[33]For example:

• Accrued liabilities or provisions relating to donations, grants or gifts to an entity that is not a Qualifying Public Benefit Entity.

• Long-term debt (for example, long-term notes payable, bonds payable) .

"Assets and liabilities held on revenue account" refers to assets and liabilities other than those held on capital account. ^[34]

Consideration in excess of Market Value

Where the amount of consideration paid by the transferee exceeds the Market Value, the transferee shall apply an adjustment to: ^[39]

1. In cases other than upon realisation (for example whilst the asset is held and used by the transferee): exclude any depreciation, amortisation or other change in value of the asset or liability to the extent that it relates to a change in value between the net book value of that asset or liability as recognised by the transferee upon the transfer and the Market Value.

   Where the above circumstances apply, the transferee may elect to recognise the excess amount derived from the difference between the net book value and the Market Value as an adjustment in calculating the Taxable Income and the above adjustment shall no longer be required in respect of that asset or liability. ^[40]

2. Upon the realisation of an asset or a liability by the transferee: include any amount by which the net book value used by the transferee when calculating the gain or loss, exceeds the Market Value identified under paragraph (a) above.

If the net book value of the asset or liability becomes equal to or less than the Market Value, or an election is made to recognise the excess amount derived from the difference between the net book value and the Market Value in Taxable Income, the adjustments under paragraphs (a) and (b) above will no longer be required.

Please note that the adjustment in this section always applies, regardless of whether the realisation basis election, as per Section 5.2 has been made or not.

Consideration lower than Market Value

Where the amount of consideration paid by the transferee is lower than the Market Value, and where the transferor has included the difference between the Market Value and the consideration in its Taxable Income, the following adjustments apply: ^[45]

1. In cases other than upon realisation: exclude any change in value of the asset or liability, to the extent that it relates to a change in the value between the Market Value of that asset or liability and its net book value as recognised by the transferee upon transfer.

2. Upon the realisation of an asset or a liability by the transferee: reduce the amount of gain by the difference in the Market Value and the net book value at the time of transfer, other than any net amount that has not been included in the Taxable Income under paragraph (a) above.

Where the net book value of the asset or liability becomes equal or higher than the Market Value, the adjustments under paragraphs (a) and (b) above will no longer apply to that asset or liability.

No deduction for expenditure which does not qualify for relief under general tax deduction rules

Any expenditure that does not meet the conditions described under Articles 28 to 33 (Chapter Nine on Deductions) of the Corporate Tax Law is not deductible regardless of its treatment in the Financial Statements. ^[54]

Capital expenditure

For the purposes of Corporate Tax, the definition of expenditure that is capital in nature is that which is treated as such under the Accounting Standards applied by the Taxable Person. ^[55]Examples would be costs incurred to acquire and improve an asset, such as acquiring new machinery, improving infrastructure or building facilities, import duties, any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management, costs of site preparation, initial delivery and handling costs.

Whilst a tax deduction is not available for expenditure which is capital in nature, ^[56]the associated depreciation, amortisation or similar changes are deductible for CorporateTax purposes. However, if the capitalised expenditure would not have been deductible had it been expenditure that is not capital in nature, the associated depreciation, amortisation or similar changes would not qualify for a tax deduction. ^[57]For instance, if a Taxable Person incurred interest expenditure that would not otherwise be deductible, for example on a loan obtained from a Related Party to acquire shares in another Related Party, ^[58]and that interest expenditure was then capitalised to gain a Corporate Tax advantage, any write-off of the capitalised interest would not qualify for a deduction for Corporate Tax purposes.

Expenditure that is capital in nature that has not been deducted for the purpose of calculating Taxable Income (except where it would not have been allowable if it was not treated as capital in nature) is deductible for Corporate Tax purposes in the calculation of gains or losses upon the realisation of the asset or liability. ^[59]

What is a Qualifying Immovable Property

A Qualifying Immovable Property is defined as any Immovable Property that meets all of the following conditions: ^[66]

• It is owned prior to the first Tax Period;

• It is measured in the Financial Statements on a historical cost basis; and

• It is disposed of or deemed to be disposed of during or after the first Tax Period for the purposes of determining the Taxable Income for a value exceeding the net book value.

Two methods to compute the excluded amount of the gain

In relation to the Qualifying Immovable Property, there are two methods to compute the excluded amount of the gain and the Taxable Person may elect either method. The methods are as follows: ^[67]

Method 1: Valuation method

The excluded amount is the amount of the gain that would have arisen had the Qualifying Immovable Property been disposed of at Market Value at the start of the first Tax Period, and considering the cost of the Qualifying Immovable Property as the higher of the original cost and the net book value. ^[68]

The Market Value at the start of the first Tax Period shall be determined by the relevant government competent authority in the UAE such as the Department of Municipalities and Transport (DMA) in Abu Dhabi, the Dubai Land Department (DLD) in Dubai, or similar authorities for each Emirate. It may also be determined by outsourced third parties authorised by the government competent authority.

The Market Value will, therefore, be determined based on the government competent authority's rules and regulations.

Method 2: Time apportionment method

The excluded gain amount is calculated by applying four steps to pro-rate the excluded gain based on the period elapsed between the time the asset was purchased and the start of the first Tax Period.

To explain these steps, the same facts mentioned in the previous example are used below (except that the Taxable Person elects to use the time apportionment method) : ^[69]

What is a Qualifying Intangible Asset

A Qualifying Intangible Asset is defined as any Intangible Asset that meets all of the following conditions: ^[72]

• It is owned prior to the first Tax Period;

• It is measured in the Financial Statements on a historical cost basis; and

• It is disposed of or deemed to be disposed of during or after the first Tax Period for the purposes of determining the Taxable Income for a value exceeding the net book value.

An Intangible Asset is defined as an intangible asset as defined in the Accounting Standards applied by the Taxable Person. ^[73]

How to compute the excluded gain

Only the time apportionment method can be used to calculate the excluded gain for Qualifying Intangible Assets. It is based on the period elapsed between the time the asset was purchased and the start of the first Tax Period. ^[74]

Except under exceptional circumstances and pursuant to approval by the FTA, only a maximum period of (10) ten years can be used to calculate the number of days the Qualifying Intangible Asset is owned before the first Tax Period. ^[75]

The calculation is demonstrated in the following example:

What is a Qualifying Financial Asset

A Qualifying Financial Asset is defined as a Financial Asset that meets all of the following conditions: ^[78]

• It is owned prior to the first Tax Period; and

• It is measured in the Financial Statements on a historical cost basis.

A Financial Asset is a financial asset as defined in the Accounting Standards applied by the Taxable Person. ^[79]

What is a Qualifying Financial Liability

A Qualifying Financial Liability is defined as a Financial Liability that meets all of the following conditions: ^[80]

• It is owned prior to the first Tax Period; and

• It is measured in the Financial Statements on a historical cost basis.

A Financial Liability is a financial liability as defined in the Accounting Standards applied by the Taxable Person. ^[81]

How to compute the excluded gain or loss

There is only one method available for computing the excluded gain or loss on Qualifying Financial Assets and Qualifying Financial Liabilities. The Taxable Person excludes the amount of the gain or loss that would have arisen, at the start of the first Tax Period, had the Qualifying Financial Assets or Qualifying Financial Liabilities been disposed of at Market Value and considering the cost of these Assets or Liabilities as being equal to the net book value. ^[82]

There is no requirement for Market Value to be determined by a competent government authority.

Ownership of Transferred Assets and Liabilities

Transferred Assets and Liabilities are Immovable Property, Intangible Assets, Financial Assets and Financial Liabilities that have been held solely by the Taxable Person and by one or more of the following Persons: ^[84]

• A member of the same Qualifying Group of the Taxable Person that has acquired the relevant assets or liabilities in accordance with Article 26(1) of the Corporate Tax Law; or

• A member of the same Tax Group of the Taxable Person that has acquired the relevant assets or liabilities in accordance with Article 42(1) of the Corporate Tax Law.

The term ownership includes the ownership by any Person who falls within the above categories.

Calculation of the period of ownership of Non-Financial Transferred Assets

Assets, other than Financial Assets, which are included within the definition of Transferred Assets and Liabilities are referred to as Non-Financial Transferred Assets. ^[85]

For the purpose of calculating the excluded amount of gain in respect of Non-Financial Transferred Assets under the time apportionment method, the period of the ownership includes the period of ownership by: ^[86]

• Any member of the same Qualifying Group of the Taxable Person that has acquired the relevant assets in accordance with Article 26(1) of the Corporate Tax Law; or

• Any member of the same Tax Group of the Taxable Person that has acquired the relevant assets in accordance with Article 42(1) of the Corporate Tax Law.

Any period of ownership before the most recent Non-Qualifying Transfer is excluded. ^[87]A Non-Qualifying Transfer is a transfer that is not covered, or would not have been covered had the Corporate Tax Law been effective, under Article 26(1) or under Article 42(1) of the Corporate Tax Law. ^[88]

Example 19: Computation of excluded gain of an Immovable Property for a Taxable Person within a Qualifying Group

Company F and G are members of a Qualifying Group. ^[89]Both companies have a first Tax Period from 1 January 2024 to 31 December 2024. On 1 January 2024, Company G's opening balance sheet includes land of AED 30,000,000.

Additional information:

• Both companies are subsidiaries of Company H. Since 2010, Company H has owned 90% of Company F and 70% of Company G. Company H's shareholding in Company G increased to 90% on 1 January 2021.

• Company F purchased the land from a third party on 1 January 2019 for AED 27,000,000.

• On 1 September 2020, Company F transferred the land to Company G for AED 30,000,000.

• The sale transaction was conducted at arm's length.

• The land is recorded in Company G's Financial Statements on a historical cost basis.

• Company G sells the land on 31 December 2024 to a third party for AED 35,000,000.

• Company G elects to adjust their Taxable Income for calculating the gain for the land using the time apportionment method (see Section 7.2).

Summary of the relevant facts for the calculation of the excluded amount of gain:

Particulars	Purchase date and amount (AED)	Transfer date and amount (AED)	Sale date and amount (AED)
Land	1 January 2019	1 September 2020	31 December 2024
	27,000,000	30,000,000	35,000,000

Analysis:

Both Company G and Company F are members of a Qualifying Group in 2024. However, they would not have been members of the same Qualifying Group had the Corporate Tax Law been effective on 1 September 2020 (the date of the transfer) . This is because Company H had a 70% shareholding in Company G at the time of transfer. Accordingly, the ownership period from 1 January 2019 to 1 September 2020 when the Immovable Property was held by Company F cannot be included in the total ownership period of Company G in the same asset.

Note: Had Company H held more than 75% in both Company G and Company F at the time of transfer, then Company G's ownership period would have been counted from 1 January 2019.

Calculation of the excluded amount of gain of the land:

Step 1 - Calculate the amount of gain that would have arisen upon the disposal of the Qualifying Immovable Property, had its cost been equal to the higher of the original cost and the net book value at the start of the first Tax Period.

Gain = 35,000,000 - 30,000,000 = 5,000,000

Step 2 - Divide the number of days the Qualifying Immovable Property is owned before the first Tax Period by the total number of days the Qualifying Immovable Property is owned.

the number of days the Qualifying Immovable Property is owned before the first Tax Period

A = the number of days the Qualifying Immovable Property is owned before the first Tax PeriodThe total number of days the Qualifying Immovable Property is owned

A = 1,216 (Number of days between 1 September 2020 and 31 December 2023)1,582 (Number of days between 1 September 2020 and 31 December 2024) = 0.7686

Only the period from 1 September 2020 is considered.

Step 3 - Multiply the amount calculated in paragraph Step 1 by the amount calculated in Step 2

B = Gain x A

B = 5,000,000 x 0.7686 = 3,843,000

Step 4 - The amount calculated in Step 3 shall be the amount of gain on the Qualifying Immovable Property excluded from the Taxable Income during the relevant Tax Period.

Excluded gain = 3,843,000

Accordingly, the taxable gain would be decreased by AED 3,843,000 as follows:

Description	Amount in AED
Total gain	5,000,000
Excluded gain	(3,843,000)
Taxable gain	1,157,000