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The Real Estate sector in the UAE has a vital role in the UAE economy. After the pronouncement of the UAE CT law in 2022, real estate players are keen to get insight into the possible impact on their business regarding tax exposure, tax positions and any relief available in their situation. While at the individual investor/property owner level, tax relief is available (i.e. generally not considered business income if held by a natural person) in the shape of Cabinet Decision No. 49 of 2023. However, real estate businesses must comply with UAE CT laws and regulations. Below is a summary of high-level considerations for the real estate sector while preparing their CT readiness.
1. Transitional Rules and Unrealized Gains related to Real Estate (Qualifying Immovable Property)
Article 61 of the Federal Decree-Law No. 47 of 2022 (the CT Law) provides the basis for the transitional rules concerning a Taxable Person’s opening balance sheet for UAE CT purposes. These rules may have the effect in certain circumstances that gains or losses attributed to certain assets before entering into the CT regime become taxable or deductible at the time of disposal of such assets.
Cabinet Decision No. 120 of 2023 further clarifies these rules and provides guidelines for adjusting a taxable person’s opening balance sheet under the Federal Decree-Law No. 47 of 2022 (the CT Law). It’s a one-time relief to the Taxable Persons by providing transitional rules for excluding gains on assets held before the corporate tax regime.
The Relief applies to specific assets and liabilities that businesses held before implementing the corporate tax law when determining a Taxable Person’s taxable gains upon disposal of below assets:
“Qualifying Immovable Property”
Gains upon disposal of Immovable property (to be deemed as “Qualifying Immovable Property” in the event the below conditions are met);
Pre-requisite for availing the Relief:
A Taxable Person may elect to adjust their Taxable Income to the extent all of the following conditions are met in the context of Immovable Property and Intangible Assets:
Upon submitting the first Tax Return for each Qualifying Immovable Property, an election must be made. The election is irrevocable except under exceptional circumstances.
Methods for Computation of Gain
In case of Qualifying Immovable Property
Gains recognised upon the disposal of a Qualifying Immovable Property after the application of the CT Law may be adjusted by using either of the following options:
Option 1: Exclude the gains that would have arisen had the asset been disposed off at the start of the first Tax Period. The amount of gain to be excluded is the difference between (1) and (2):
(1) the Market Value (“MV”) of the asset at the start of the first Tax Period (the Market Value of the Qualifying Immovable Property shall be determined by the relevant government competent authority in the State).
(2) the higher of the original cost and the net book value (“NBV”) of the asset at the start of the first Tax Period
Option 2: The amount of gain to be excluded is calculated as:
SP = Sales proceeds at the disposal of the asset
Cost = higher of the original cost and NBV At the start of the first tax period
DBCT = Number of days the asset was owned before the first tax period
TD = Total number of days the asset was owned
The election for calculating the gain should be made for each immovable property upon submitting the first Tax Return and is subject to approval from the Authority. Once the election is approved and made for immovable property, it shall be deemed irrevocable.
Free zone
2. Real Estate Located in Free Zone
Cabinet Decision No. 55 of 2023 has shed light on income derived from immovable property in the free zone and describes it as excluded income, i.e. nonqualifying income, and thus attracts 9% CT. However, commercial property transactions (located in FREE ZONE) with free zone persons fall under the category of QFZI. Below is a hi-level commentary related to real estate located in the free zone.
Income attributable to Immovable Property located in a Free Zone
Income attributable to immovable property located in a Free Zone that is derived from the below transactions shall be considered as Taxable Income and attracts corporate tax @ 9% (without the benefit of basic threshold exemption of AED 375,000 of taxable income):
Commercial Property has been defined to mean an immovable property or part thereof:
1. Used exclusively for a Business or Business Activity
2. Not used as a place of residence or accommodation including hotels, motels, bed and breakfast establishments, serviced apartments and the like. Specific tax advice in terms of tax readiness, tax positions, key exposures, reliefs, qualitative and quantitative aspects etc. can be furnished after conducting scenario analysis.
