UAE companies can adjust tax treatment of some assets before corporate tax enforcement

The Ministry of Finance also announced additional flexibility for the property sector

The Abu Dhabi skyline. Small UAE businesses with a revenue of Dh3 million or less can benefit from a new corporate tax relief programme. Khushnum Bhandari / The National

Businesses can adjust their tax treatment of certain assets and liabilities before the UAE corporate tax law comes into effect on June 1.

The ministry outlined transitional rules on how a company can adjust its opening balance sheet under the new law.

The decision applies to immovable property, intangible assets and the financial assets and liabilities held by businesses before the corporate tax law comes into effect.

Companies must make the decision when submitting their first tax return, the ministry said on Friday, adding that the choice would be permanent except in special circumstances.

The ministry's decision also takes into account ownership history, including assets and liabilities owned by the company or other members of the same business group.

"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 Al Khouri, undersecretary in the Ministry of Finance.

“The aim is to ease the process of determining the opening balance sheet, ensuring a fair and transparent approach for assets and liabilities held prior to the implementation of the new corporate tax regime."

The Ministry of Finance announced additional flexibility for the property sector.

Companies with immovable property can choose between a time apportionment method or valuation method for relief, enabling them to select the most beneficial option on an asset-by-asset basis, the ministry said.

Another possible scenario would be a local business that holds shares in another company recorded on a historical cost basis before the enactment of the tax law, the Finance Ministry said.

“When this local business sells these shares after the law comes into effect, it can adjust its taxable income by excluding a portion of the gain based on the shares' value at the start of the first tax period,” it added.

In January last year, the UAE introduced the federal corporate tax with a standard statutory rate of 9 per cent starting from the financial year beginning on or after June 1, 2023.

It brought the income of companies exceeding Dh375,000 ($102,110) within the taxable bracket.

Taxable profits below that threshold will be subject to a zero per cent rate.

In April, the ministry also clarified that small businesses in the UAE with revenue of Dh3 million or less can benefit from a new corporate tax relief programme.

Last week, the ministry also issued three new ministerial decisions that explain exemptions and preparation of financial statements before the introduction of corporate tax.

The first ministerial decision clarifies the basis of preparing financial statements and mechanisms for consolidating them within a tax group, the ministry said on Tuesday.

The second deals with conditions for the exemption of private regulated pension funds and social security funds from corporate tax.

The ministry addressed the issue of determining conditions for claiming the participation exemption, including the subject to tax requirement and “the minimum historical acquisition cost for a participating interest” in the third decision.