Application of the valuation method under the transitional rules as set out in Ministerial Decision No. 120 of 2023 on disposal of Qualifying Immovable Property by a real estate developer that is a Taxable Person - CTP009
CTP009
Corporate Tax Public Clarification
Application of the valuation method under the transitional rules as set out in Ministerial Decision No. 120 of 2023 on disposal of Qualifying Immovable Property by a real estate developer that is a Taxable Person
Issue
Corporate Tax in the UAE is regulated by Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Business and its amendments ("Corporate Tax Law"), and its implementing decisions.
For the purposes of Article 61(1) of the Corporate Tax Law, a Taxable Person's opening balance sheet shall be the closing balance sheet prepared for financial reporting purposes[1] (under International Financial Reporting Standards, "IFRS"[2], or International Financial Reporting Standards for Small and Medium Enterprises, "IFRS for SMEs"[3], as applicable) on the last day of the Financial Year that ends immediately before their first Tax Period commences.
The transitional rules prescribe adjustments that may be made to Taxable Income in relation to gains and losses which are recognised after the start of the first Tax Period, for certain categories of assets and liabilities owned prior to the first Tax Period, as specified in Ministerial Decision No. 120 of 2023 on the Adjustments Under the Transitional Rules for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations ( "Ministerial Decision No. 120 of 2023") , to exclude the portion of the gain or loss attributable to the pre-Corporate Tax ownership period of the relevant asset or liability.
Article 2 of Ministerial Decision No. 120 of 2023 provides that a Taxable Person may elect when submitting its first Tax Return to adjust its Taxable Income in respect of any gains arising on disposal (or deemed disposal) of a Qualifying Immovable Property in the first Tax Period or subsequent Tax Periods to exclude the portion of the gain (and not a loss) attributable to the pre-Corporate Tax ownership period.[4],[5],[6] The election is irrevocable except under exceptional circumstances and pursuant to the approval by the Federal Tax Authority ("FTA").
There are two methods for calculating the excluded gain: the valuation method and the time apportionment method. This Public Clarification covers the valuation method only.[5]
The purpose of this Public Clarification is to clarify the application of the valuation method under the transitional rules as stated in Article 2(2)(a) of Ministerial Decision No. 120 of 2023 [5] to real estate developers that are Taxable Persons making off-plan sales and recognising the revenue from those sales over the period of construction in line with IFRS 15, or equivalent standard under IFRS for SMEs, in respect of projects under construction (and not yet completed before the start of the first Tax Period), in the situations specified below:
Where land was owned before the first Tax Period and the construction commenced after the start of the first Tax Period.
Where the project is work in progress at the start of the first Tax Period and the construction commenced before the first Tax Period.
Summary
The adjustment under the transitional rules applies to Qualifying Immovable Property, i.e. Immovable Property that meets all of the conditions set out in Article 2(1) of Ministerial Decision No. 120 of 2023 [4]. For real estate developers, the FTA considers the Qualifying Immovable Property to be either the entire project or specific unit(s) within the project, based on the accounting recognition of the project. In other words, the adjustment under the transitional rules will follow the basis of realisation of accounting profits. The classification of Immovable Property under IFRS or IFRS for SMEs, whether as a fixed asset or inventory, does not impact the application of the adjustment under the transitional rules.
"Disposal" or "deemed disposal" for the purposes of the application of the transitional rules should follow the principles of the Accounting Standards applied by the Taxable Person (i.e. IFRS or IFRS for SMEs, as applicable). Accordingly, if a Taxable Person recognises revenue as the performance obligation is satisfied in accordance with IFRS 15, for example, based on the percentage of completion, such revenue recognition is considered a "disposal" or "deemed disposal".
Under the valuation method set out in Article 2(2)(a) of Ministerial Decision No. 120 of 2023 [5], the gain to be excluded is calculated as the difference between the Market Value of the Qualifying Immovable Property at the start of the first Tax Period, and the higher of the original cost and the net book value of the Qualifying Immovable Property at the start of the first Tax Period.
The Market Value, the original cost and the net book value must be for the same specific Qualifying Immovable Property. If any of these values do not relate to the specific Qualifying Immovable Property, appropriate adjustments must be made.
The Market Value of each Qualifying Immovable Property element at the start of the first Tax Period shall be determined by the relevant government competent authority in the UAE, including accredited valuers specified by the relevant government competent authority.
For the purposes of the calculation of the adjustment under the transitional rules, the Market Value must be in relation to the Qualifying Immovable Property only. Where this is not the case, the Market Value should be adjusted. The adjustment applies where the Market Value includes the value of a part of the project that will not be disposed of (or will not be deemed to be disposed of), such as the portion of the Immovable Property where the ownership is retained by the real estate developer. The adjustment shall also be made to exclude the portion of the Market Value attributable to any Immovable Property already disposed of (or deemed to be disposed of) before the start of the first Tax Period.
For the purposes of the calculation of the adjustment under the valuation method, the original cost, and net book value should be determined in respect of the Qualifying Immovable Property only. This shall consider the cost of the project recognised in the opening balance sheet at the start of the first Tax Period, i.e. the capitalised cost less the portion recognised in the statement of income in periods before the start of the first Tax Period.
The following steps should be taken in calculating the excluded amount of gain under the valuation method of the transitional rules:
Step 1: Calculation of the overall excluded gain for each Qualifying Immovable Property element by deducting the higher of the original cost and net book value from the Market Value (or adjusted Market Value where the Market Value relates to elements that are not considered part of the Qualifying Immovable Property) at the start of the first Tax Period.
Step 2: Apportionment of the excluded gain, as calculated in Step 1, for the relevant Tax Period on the basis of revenue recognition under the applicable Accounting Standards, such as the percentage of completion in accordance with IFRS 15.
Step 3: Determination of the accounting profits (or a portion thereof, as applicable) attributable to the Qualifying Immovable Property element on a fair and reasonable basis.
The adjustment under the transitional rules will not be available in a Tax Period if the apportioned amount attributable to the Qualifying Immovable Property element under Step 3 is an accounting loss.
Step 4: The excluded gain determined under Step 2 is used for adjustment of the accounting profits determined under Step 3 in each relevant Tax Period up to the amount of such accounting profits. Any excess excluded gain will be forfeited and cannot be carried forward to future Tax Periods.
Detailed Analysis
What is a Qualifying Immovable Property in respect of real estate developers?
The transitional rules apply to "Qualifying Immovable Property".
The term "Immovable Property" is defined in Article 1 of Cabinet Decision No. 56 of 2023 on Determination of a Non-Resident Person's Nexus in the State for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (" Cabinet Decision No. 56 of 2023"), applicable to Tax Periods that commenced before 1 January 2025, and Article 1 of Cabinet Decision No. 35 of 2025 on Determination of a Non-Resident Person's Nexus in the State for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (" Cabinet Decision No. 35 of 2025 "), applicable to Tax Periods commencing on or after 1 January 2025, as any of the following:
Any area of land over which rights or interests or services can be created.
Any building, structure or engineering work attached to the land permanently or attached to the seabed.
Any fixture or equipment which makes up a permanent part of the land or is permanently attached to the building, structure or engineering work or attached to the seabed.
Accordingly, for real estate developers, a real estate project or any element of it, such as land or specific property or building, whether completed or under construction, is considered an Immovable Property.
The classification of Immovable Property under IFRS or IFRS for SMEs, whether as a fixed asset, for instance, property plant and equipment, or inventory, does not impact the application of the transitional rules.
Instead, the Immovable Property must first fall within the definition as specified under Article 1 of Cabinet Decision No. 56 of 2023 and Article 1 of Cabinet Decision No. 35 of 2025, and then such Immovable Property must fall within the definition of Qualifying Immovable Property for the purposes of the transitional rules.
For Immovable Property to be considered as Qualifying Immovable Property as defined under Article 1 of Ministerial Decision No. 120 of 2023, all of the following conditions, in accordance with Article 2(1) of Ministerial Decision No. 120 of 2023, must be met:
The Immovable Property is owned prior to the first Tax Period.
The Immovable Property is measured in the Financial Statements[7] on a historical cost basis.
The Immovable Property 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.
Where all the above conditions are satisfied in respect of a real estate project or an element of it, the real estate project, or the relevant element, will be considered as Qualifying Immovable Property.
Where an Immovable Property is classified as inventory for financial reporting purposes and is measured in the Financial Statements[7] at the lower of cost or net realisable value, for the purposes of the transitional rules, such Immovable Property will be considered as measured on a historical cost basis.
Accordingly, for real estate developers can consider the following categories of assets as examples of Qualifying Immovable Property:
Land parcels acquired before the first Tax Period on which construction of buildings commences on or after the first Tax Period. In this case, only the land parcels will be considered the Qualifying Immovable Property, as these are the only element of the real estate project that existed prior to the first Tax Period.
Under construction properties, where construction commenced before the first Tax Period and continues after the start of the first Tax Period. In this case, the Qualifying Immovable Property is considered the whole real estate project, i.e. the land element and the properties under construction.
Fully constructed projects before the start of the first Tax Period, sold or intended to be sold after the start of the first Tax Period.
If any element of a real estate project did not exist before the first Tax Period, i.e. it had not been recognised in the opening balance sheet, any gain arising from the disposal or deemed disposal of that element cannot be adjusted for under the transitional rules as such element shall not be a Qualifying Immovable Property.
In cases where construction of the real estate project commenced before the start of the first Tax Period and extends beyond the start of first Tax Period, the adjustment under the transitional rules may be available in respect of the project as a whole, as such a project would meet the definition of a Qualifying Immovable Property.
In cases where construction of the project has not commenced and only the land parcels are owned by the real estate developer at the start of the first Tax Period, the adjustment under the transitional rules may be available in respect of the land parcels that meet the definition of Qualifying Immovable Property, and no adjustment under the transitional rules will be available on gains attributable to the building element since the buildings are constructed during or after the first Tax Period and do not meet the definition of Qualifying Immovable Property.
Disposal or deemed disposal for the purposes of Article 2(1)(c) of Ministerial Decision No. 120 of 2023
For the purposes of Article 2(1)(c) of Ministerial Decision No. 120 of 2023[4], the meaning of "disposal" or "deemed disposal" should follow the accounting principles applied by the Taxable Person in accordance with IFRS or IFRS for SMEs as applicable. In accordance with the relevant Accounting Standards, revenue and the associated expenses can be recognised from the sale of real estate under a long-term contract in the statement of income, either over time based on output methods or input methods for example, the percentage of completion of a development project, or at a point in time.
Under IFRS, a disposal or deemed disposal includes a derecognition event. Such an event occurs when an entity loses control of all or part of the recognised asset. Under IFRS 15, an entity shall recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (i.e. an asset) to a customer. An asset is considered to be transferred when (or as) the customer obtains control of that asset.
For Corporate Tax purposes, and in particular for the purposes of Ministerial Decision No. 120 of 2023, a Taxable Person makes a disposal or deemed disposal of a Qualifying Immovable Property in the Tax Period(s) in which the revenue, and the associated costs including land costs and construction costs, are recognised in the statement of income in accordance with IFRS or IFRS for SMEs as applicable.
In the case of the development and sale of off-plan properties, there could be a situation where the sale and purchase agreement for off-plan properties was executed with customers before the first Tax Period, but the recognition of revenue and expenses in the Financial Statements[7] (based on IFRS or IFRS for SMEs) occurs over a period of time, for example based on the percentage of completion, i.e. during the first Tax Period and subsequent Tax Periods. In such cases, the disposal or deemed disposal event arises in the Tax Period(s) in which the revenue and the associated costs including land costs and construction costs, are recognised in the statement of income in accordance with IFRS or IFRS for SMEs as applicable.
To the extent that the developer retains an interest in the land or building, such relevant part of the land or building will not be treated as being disposed of (or deemed to be disposed of) for the purposes of the adjustment.
Determination of Market Value, original cost and net book value under the valuation method
Articles 2(2)(a) and 2(2)(b) of Ministerial Decision No. 120 of 2023 provide for a valuation method or time apportionment method to be used to compute the excluded gain in relation to a Qualifying Immovable Property.
Where a real estate developer intends to use the valuation method[5], the amount of gain should be computed by calculating the difference between the Market Value of the Qualifying Immovable Property at the start of the first Tax Period, and the higher of the original cost and the net book value of the Qualifying Immovable Property at the start of the first Tax Period.
Original cost/net book value under the valuation method
Costs incurred by real estate developers can include the land cost, the construction cost and other related costs, commonly referred to as capital work in progress or construction work in progress. Such work in progress at the start of the first Tax Period can be used as the original cost and net book value (where inventory has not been written down to net realisable value) to compute the adjustment, provided such work in progress relates only to the relevant Qualifying Immovable Property that was held at the start of the first Tax Period.
For ongoing projects where construction of a real estate project is in progress and revenue recognition commenced prior to the start of the first Tax Period, a portion of the costs (land cost and/or construction costs/other related cost) may have already been recognised in the statement of income in accordance with IFRS, or IFRS for SMEs as applicable. In such cases, where costs were already recognised in the statement of income prior to the start of the first Tax Period, the conditions of Article 2(1)(a) and 2(1)(c) of Ministerial Decision No. 120 of 2023[4] would not be satisfied, as a portion of the Immovable Property would already have been considered disposed of (or deemed to be disposed of) prior to the first Tax Period and, therefore, not be considered Qualifying Immovable Property.
Therefore, the portion of the project recognised for accounting purposes in the statement of income prior to the first Tax Period must not be taken into account when calculating the adjustment under the transitional rules.
Market Value under the valuation method
The Market Value of each Qualifying Immovable Property 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.
The Market Value may be determined by outsourced third parties authorised by the government competent authority (accredited valuers specified by the relevant government competent authority). A Market Value determined by persons that are not authorised by the relevant government competent authority will not be accepted for the purpose of computing the adjustment under the transitional rules.
For the purpose of the calculation of the excluded gain under the transitional rules, the Market Value must be determined and obtained in relation to Qualifying Immovable Property only.
If the Market Value, at the time of computing the adjustment, does not only relate to Qualifying Immovable Property it would not be considered acceptable for the purposes of the adjustment under the transitional rules, unless reasonable adjustments are made as follows:
A portion of the real estate development project may have already been disposed of or deemed to have been disposed of prior to the start of the first Tax Period and no adjustment would be available under the transitional rules for this portion of the project. Accordingly, the Market Value should be adjusted to exclude the amount attributable to the portion that has been (or is deemed to have been) disposed of prior to the first Tax Period. The attribution must be made on a fair and reasonable basis.
The real estate development project may include Immovable Property that will not be disposed of to customers, for example, communal areas that are not reflected in the value of the Qualifying Immovable Property being sold to the customers and are to be retained by the developer. The Market Value should, therefore, be adjusted for such Immovable Property, on a fair and reasonable basis.
The Market Value in respect of a real estate project under construction at the start of the first Tax Period may not reflect its partially completed state, instead it reflects its completed state. The Market Value should, therefore, be adjusted, on a fair and reasonable basis, to reflect the partially completed state of the real estate project.
Basis of election under Article 2(5) of Ministerial Decision No. 120 of 2023 â application to 'each' Qualifying Immovable Property
The election made in accordance with Article 2(5) of Ministerial Decision No. 120 of 2023[8] is in respect of each Qualifying Immovable Property. Therefore, the Market Value, original cost, and net book value should be determined in respect of each Qualifying Immovable Property.
Qualifying Immovable Property can be either the entire real estate development project or specific unit(s) within the project. The adjustment under the transitional rules will follow the basis of realisation of accounting profits in relation to each Qualifying Immovable Property, as the case may be.
The accounting profits recognised may be reflective of several projects at different stages of development. For example, if a Taxable Person undertakes Project A and Project B, and each has a Market Value based on the stage of completion at the start of the first Tax Period, then Project A and Project B could each be considered separate Qualifying Immovable Properties for the purposes of the adjustment under the transitional rules, subject to the relevant conditions being met.
The adjustment must be calculated for each Qualifying Immovable Property (being either the entire project or each specific unit(s)) and the timing of the adjustment should follow the recognition of accounting profits in relation to each Qualifying Immovable Property (see section below regarding methodology of calculation of the adjustment).
Method for calculation of the adjustment and timing of adjustment under the valuation method
To determine the excluded amount of gain under the valuation method of the transitional rules for the relevant Tax Period for each Qualifying Immovable Property, the following steps should be taken:
Step 1: Calculation of the overall excluded gain
Calculation of the overall excluded gain for each Qualifying Immovable Property by deducting the higher of the original cost and net book value from the Market Value (or adjusted Market Value where the Market Value includes elements that are not considered part of the Qualifying Immovable Property) at the start of the first Tax Period.
Step 2: Apportionment of the excluded gain
Apportionment of the excluded gain, as calculated in step 1, for the relevant Tax Period on the basis of the revenue recognition under the applicable Accounting Standards, such as the percentage of completion in accordance with IFRS 15.
Step 3: Determination of the attributed accounting profits
Where only part of the project is eligible for the adjustment, for example, where land was owned but construction had not started before the start of the first Tax Period, determination of the portion of the accounting profits attributable to the Qualifying Immovable Property element, which in this case will be land, on a fair and reasonable basis.
The adjustment under the transitional rules will not be available in a Tax Period if the amount attributable to the Qualifying Immovable Property under Step 3 is an accounting loss in that Tax Period.
Step 4: Determination of the excluded gain in each Tax Period
The excluded gain determined under Step 2 is used for adjustment of the accounting profits determined under Step 3 in each relevant Tax Period up to the amount of such accounting profits. Any excess excluded gain will be forfeited and cannot be carried forward to future Tax Periods.
Example 1: Real estate development project where construction commences during or after the first Tax Period
Company A is a Taxable Person that is a real estate developer. It prepares its Financial Statements in accordance with IFRS and adopts an accounting policy based on the cost model permitted under IFRS. It follows the Gregorian calendar year as its Tax Period.
Company A plans to develop a "Project" with 20 identical townhouses on a land parcel acquired in Dubai on 10 June 2020 for AED 20,000,000.
The total development cost (construction cost and other related costs) as expected by the company is AED 20,000,000. Accordingly, the total expected cost of the Project amounts to AED 40,000,000 (i.e. cost of the land AED 20,000,000 plus expected development cost of AED 20,000,000).
The expected cost for each townhouse amounts to AED 2,000,000 (i.e. total cost AED 40,000,000 for 20 townhouses).
| Project details | Value (in AED) |
|---|---|
| Land cost | 20,000,000 |
| Development estimated cost | 20,000,000 |
| Total Project cost | 40,000,000 |
| Number of townhouses | 20 |
| Estimated cost per townhouse | 2,000,000 |
| Selling price per townhouse | 4,000,000 |
In 2024, the company's first Tax Period, Company A begins construction of the townhouses and markets them off-plan on a freehold basis (the townhouse owners will hold an equal 1/20 share in the land). In 2024, the company successfully signed 15 sales agreements to sell 15 townhouses each for AED 4,000,000. As of 31 December 2025, the remaining 5 townhouses were still not sold, though intended to be sold. Company A recognises revenue and associated costs related to the sale of each of the 15 townhouses in its statement of income based on an input method under IFRS 15 (i.e. percentage of completion method).
For Corporate Tax purposes, and in particular for the purposes of Ministerial Decision No. 120 of 2023, the timing of the disposal will align with the revenue recognition as per Company A's Financial Statements.
At the beginning of its first Tax Period, the Gregorian calendar year 2024, the net book value of the Project was AED 20,000,000, reflecting the acquisition cost of the land, as no other costs had been capitalised as the construction started during 2024.
In 2024, in accordance with IFRS, the company has not yet recognised any revenue/cost in its statement of income in respect of the project. Accordingly, no adjustment under the transitional rules can be made.
In 2025, the company first recognised revenue and associated costs of AED 12,000,000 and AED 6,000,000 respectively, resulting from a 20% completion ratio related to the sale of the 15 townhouses. As the company accounts for the project based on each townhouse, the company has recognised revenue and cost in respect of each townhouse separately:
Revenue per townhouse: 20% x AED 4,000,000 = AED 800,000. Total Revenue = 15 x AED 800,000 = AED 12,000,000.
Cost per townhouse: 20% x AED 2,000,000 = AED 400,000. Total cost = 15 x AED 400,000 = AED 6,000,000.
| Description | 2024 (in AED) | 2025 (in AED) |
|---|---|---|
| Project opening balance cost (Capital Work in Progress) | 20,000,000 | 24,000,000 |
| Development cost incurred and recognised in the balance sheet | 4,000,000 | 6,000,000 |
| Revenue from Project recognised in the statement of income | - | 12,000,000 (800,000 per townhouse) |
| Project cost recognised in the statement of income | - | 6,000,000 (400,000 per townhouse) |
| Project closing balance cost | 24,000,000 | 24,000,000 |
| Accounting profit from Project | - | 6,000,000 (400,000 per townhouse) |
When submitting its 2024 Tax Return, Company A elects to apply the transitional rules for each townhouse of the project. Since the land is the only element of the project owned prior to the first Tax Period, the gain to be excluded under the transitional rules pertains to each land parcel (or part of the land parcel) disposed of with each townhouse, as this constitutes the "Qualifying Immovable Property" held by Company A at the start of the first Tax Period. The exclusion under the transitional rules shall only be in respect of the land element of the project.
Company A selects the valuation method to calculate the excluded gain and has obtained a valuation report from the DLD indicating that the land had a Market Value of AED 30,000,000 as of 1 January 2024.
It is to be noted that the adjustment under the transitional rules will not apply during the first Tax Period (2024) since there was no disposal (or deemed disposal) of the Qualifying Immovable Property in 2024 (i.e. no revenue was recognised in the statement of income for 2024).
Calculation of the excluded gain in 2025 (first year of revenue recognition):
Market Value at the start of the first Tax Period:
Based on the valuation from DLD, the Market Value of the land is AED 30,000,000. As construction has not commenced before the start of 2024, the Market Value as determined by DLD shall be considered the Market Value of the Qualifying Immovable Properties, i.e. the land in respect of the 20 townhouses. Since the townhouses are identical, the Market Value for each Qualifying Immovable Property, i.e. the portion of the land for each townhouse, shall be AED 30,000,000/20 = AED 1,500,000.
Original cost and net book value at the start of the first Tax Period:
The net book value of the land related to each townhouse matches its original cost and is AED 20,000,000/20 = AED 1,000,000.
Calculation under the 4 steps explained above:
Step 1: The overall excluded gain
Overall excluded gain per townhouse = Market Value â [higher of original cost and net book value] = AED 1,500,000 - 1,000,000 = AED 500,000.
Step 2: Apportionment of the excluded gain for the Tax Period 2025
Based on the percentage of completion in 2025, only 20% of the revenue and cost of each of the 15 townhouses was recognised in the statement of income during 2025. The company used the same percentage to apportion the excluded gain in respect of 2025, as follows:
Excluded gain in 2025 = 20% x AED 500,000 = AED 100,000 for each townhouse.
Step 3: Determination of the accounting profits attributable to the Qualifying Immovable Property element in 2025
As only the land was owned but construction had not started before the first Tax Period, the company attributed the accounting profit of each townhouse to land as follows:
Percentage of completion x land cost / cost released to the statement of income in 2025 = 20% x 1,000,000/400,000 = 50%. This means AED 200,000 (i.e. 50% of AED 400,000) shall be considered as the accounting profit in respect of the land element of each townhouse.
Step 4: Adjustment under the Transitional Rules of the excluded gain in 2025
The excluded gain determined under Step 2, i.e. AED 100,000 for each townhouse, is used for adjustment of the accounting profits for 2025 determined in Step 3, up to the accounting profit determined for that year, i.e. AED 200,000. In this case, as the AED 100,000 does not exceed AED 200,000, the whole AED 100,000 shall be excluded for each townhouse in 2025. The total excluded gain for the 15 townhouses shall be AED 1,500,000 (i.e. AED 100,000 x 15).
With respect to the 5 unsold townhouses, the adjustment under the transitional rules on the Qualifying Immovable Property element, i.e. on the land, should be assessed in the Tax Period in which there has been a disposal, and accordingly when revenue and costs are recognised in the statement of income.
Example 2: Real estate development project where construction commenced before the first Tax Period
Company B is a Taxable Person that is a real estate developer. It prepares its Financial Statements in accordance with IFRS and adopts an accounting policy based on the cost model permitted under IFRS. It follows the Gregorian calendar year as its Tax Period.
The start of the first Tax Period of Company B is 1 January 2024.
In October 2021, Company B decides to develop a project that involves constructing 20 identical villas on a land parcel acquired in Dubai in 2020 for AED 30,000,000.
The total development cost expected by the company was AED 45,000,000 (representing construction cost and other related costs of the project). Hence, the total expected cost of the project amounted to AED 75,000,000 (i.e. cost of the land AED 30,000,000 plus expected development cost AED 45,000,000).
The expected cost for each villa amounted to AED 3,750,000 (i.e. total cost AED 75,000,000 / 20 villas).
In 2023, Company B begins construction of the villas and markets them off-plan on a freehold basis (the villa owners will hold an equal 1/20 share in the land). The company successfully signed 20 sales agreements to sell the 20 villas each for AED 7,000,000. Company B recognises revenue and associated costs related to the sale of the villas in its statement of income based on the input method under IFRS 15 (i.e. percentage of completion method).
The below table summarises figures related to the development project (amounts in AED thousands):
| Description | 2023 | 2024 | 2025 |
|---|---|---|---|
| Development costs capitalised (excluding land) | 9,000 | 27,000 | 9,000 |
| Percentage of completion (cumulative) | 20% | 80% | 100% |
| Portion completed during the year | 20% | 60% | 20% |
| Revenue recognised in the statement of income | 28,000 | 84,000 | 28,000 |
| Cost recognised in the statement of income | 15,000 | 45,000 | 15,000 |
| Accounting profit | 13,000 | 39,000 | 13,000 |
The "development costs" do not include the land cost, they represent the cost incurred each year (i.e. the construction cost and other related costs). These costs are initially capitalised to the project and recorded in the balance sheet during each year. Subsequently at the end of each year, along with a portion of the land cost based on the percentage of completion, they are transferred to the statement of income, representing the "cost recognised in the statement of income" mentioned in the table above.
The percentage of completion represents the cumulative percentage of construction completion based on IFRS. The portion completed during the year is used by the company to recognise relevant revenue and associated cost related to the project in the statement of income.
The accounting profit represents the difference between the revenue and the cost of the villas as recognised in the statement of income.
At the beginning of its first Tax Period, the Gregorian calendar year 2024, Company B has a project under construction recognised in their opening balance sheet as a Capital Work in Progress at AED 24,000,000, reflecting the net book value of the project (i.e. historical acquisition cost of the land, being AED 30,000,000 plus actual cost in 2023 of AED 9,000,000 less cost transferred to statement of income in 2023 of AED 15,000,000). This represents, for the purposes of Ministerial Decision No. 120 of 2023, the original cost and the net book value of the Qualifying Immovable Property that is a property under construction.
When submitting its 2024 Tax Return, Company B elects to apply the transitional rules for the project. As the construction started before the first Tax Period, the Qualifying Immovable Property is considered the real estate project in its entirety excluding the part disposed of before the first Tax Period.
Company B selects the valuation method to calculate the excluded gain and has obtained a valuation report, from the DLD indicating that the Market Value of the project at 1 January 2024 is AED 90,000,000.
Calculation of the excluded gain
Market Value at the start of the first Tax Period:
Based on the valuation from DLD, the Market Value of the project is AED 90,000,000.
As part of the project revenue has been recognised in the statement of income in 2023, that part of the project is considered disposed of prior to the start of the first Tax Period. Accordingly, for the purpose of calculating the adjustment under the transitional rules, Company B adjusts the Market Value to exclude the amount attributable to that part disposed of in 2023.
The adjustment is made based on the percentage of completion. As 20% of the project revenue has been considered recognised in 2023, the Market Value is reduced by that same percentage. The "adjusted Market Value" is 80% of the Market Value, i.e. 80% x AED 90,000,000 = AED 72,000,000. This "adjusted Market Value" is considered the "Market Value" for the purpose of calculating the adjustment for the transitional rules.
Higher of net book value and original cost at the start of the first Tax Period:
The net book value of the Qualifying Immovable Property is AED 24,000,000 which is also considered as the original cost as at the start of the first Tax Period, being 1 January 2024.
Calculation under the 4 steps explained above:
Step 1: The overall excluded gain
Overall excluded gain = adjusted Market Value â [higher of original cost and net book value] = AED 72,000,000 - 24,000,000 = AED 48,000,000.
Step 2: Apportionment of the excluded gain for the Tax Periods 2024 and 2025
Company B uses the percentage of completion of each year (i.e. the portion completed during the year) to apportion the excluded gain as follow:
| 2024 | 2025 | |
|---|---|---|
| Portion completed during the year | 60% | 20% |
| Excluded gain (AED Thousands) | 36,000 (60/80 x AED 48m) | 12,000 (20/80 x AED 48m) |
Step 3: Determination of the attributed accounting profits to the villas considered as Qualifying Immovable Property
As the construction started before the first Tax Period, the Qualifying Immovable Property is considered the real estate project in its entirety (excluding the part disposed of before the first Tax Period). Accordingly, the accounting profit as recognised in the income statement in each of Tax Periods 2024 and 2025 is considered attributed to the Qualifying Immovable Property.
As a result, the accounting profit is as follows (as per the table above):
2024: AED 39,000,000.
2025: AED 13,000,000.
Step 4: Adjustment under the Transitional rules of the excluded gain
The excluded gains determined under Step 2, i.e. AED 36,000,000 in 2024 and AED 12,000,000 in 2025 are used for adjustment of the accounting profits determined in Step 3 against and up to the accounting profits determined for each of those years, i.e. AED 39,000,000 and AED 13,000,000 respectively.
Amounts in AED thousands:
| 2024 | 2025 | |
|---|---|---|
| Accounting profit | 39,000 | 13,000 |
| Excluded gain | (36,000) | (12,000) |
| Taxable gain | 3,000 | 1,000 |
In this case, as the excluded gain in each year does not exceed the accounting profit of each year, the whole excluded gain in each year is excluded when calculating the Taxable Income.
This Public Clarification issued by the FTA is meant to clarify certain aspects related to the implementation of the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Business, and its amendments, and Ministerial Decision No. 120 of 2023 on the Adjustments Under the Transitional Rules for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, and its amendments.
This Public Clarification states the position of the FTA and neither amends nor seeks to amend any provision of the aforementioned legislation. Therefore, it is effective as of the date of implementation of the relevant legislation, unless stated otherwise.
The examples in this Public Clarification show how these elements operate in isolation and do not show all the possible interactions with other provisions of the Corporate Tax Law that may occur. They do not, and are not intended to, cover the full facts of the hypothetical scenarios used nor all aspects of the Corporate Tax regime, and should not be relied upon for legal, accounting, regulatory or tax advice purposes. These examples are only meant for providing the readers with general information on the subject matter of this Public Clarification. They are exclusively intended to explain the rules related to the subject matter of this Public Clarification and do not relate at all to the tax, accounting, regulatory or legal position of any specific juridical or natural persons.