01/09/2025
Transitional Exemption under the UAE Corporate Tax Law
Introduction and Legal Basis
Article 61 of the UAE Corporate Tax Law, in addition to Ministerial Decision No. (120) of 2023, stated the transitional exemption. This addresses unrealized gains or losses accumulated on specific assets and liabilities prior to the commencement of the first tax period. It facilitates a smoother transition for businesses into the tax system.
General Provisions of Transitional Rules
For corporate tax purposes, the closing balance sheet at the last day of the financial year (which immediately precedes the first day of the tax period, e.g., December 31, 2023) is considered the opening balance sheet at the first tax period (January 1, 2024).
The exemption excludes unrealized profits or losses that arose before the first tax period. This applies only to specific assets—namely real estate, intangible assets, and financial assets and liabilities—that were owned before that period and recorded at historical cost.
A key condition for this exemption is the preparation of financial statements on an accrual accounting basis. Consequently, entities that utilize cash-basis accounting are ineligible.
Taxable persons must elect to apply this exemption in their first tax return. This election is irrevocable, except with the Federal Tax Authority's approval in exceptional circumstances.
Application to Asset Categories
Real Estate
The election to apply the transitional exemption is made on a per-property basis. There are two methods to calculate excluded gains:
Valuation Method: It is based on the difference between the property's market value at the start of the first tax period and its historical cost.
2. Time Apportionment Method: Calculating the ratio of the time the property was held before the start of the first tax period to the total holding period.
Example
Company A owned a property prior to the commencement of its first tax period on January 1, 2024.
Historical Cost: AED 3,000,000
Market Value (Dec. 31, 2023): AED 3,400,000
The company sold the property in 2024 for AED 4,000,000.
- Total Profit = AED 4,000,000 - AED 3,000,000 = AED 1,000,000
- Excluded Profit (using valuation method) = AED 3,400,000 - AED 3,000,000 = AED 400,000
- Taxable Profit = AED 1,000,000 - AED 400,000 = AED 600,000
Intangible Assets
The election for the transitional exemption applies to all pre-owned intangible assets recorded at historical cost, with the pre-tax holding period capped at 10 years. This cap may only be extended with approval from the Federal Tax Authority. Excluded profits must be calculated using the time apportionment method.
Eligible Financial Assets and Liabilities
The election for this exemption is applied to all eligible financial assets and liabilities, in accordance with their nature as defined under International Financial Reporting Standards (IFRS). (e.g., accounts receivable, equity investments, accounts payable, lease obligations) that were held prior to the first tax period
Pursuant to Ministerial Decision No. (120) of 2023, gains or losses arising from the disposal of these items may be excluded. The Valuation Method is used to calculate the excluded amount.
Example
Company S's first tax period commenced on February 1, 2024. Its opening balance sheet included shares in Company "X" with a historical book value of AED 5,000. The fair market value of these shares as of this date was AED 7,000.
The company subsequently disposed of the shares in August 2025 for AED 10,000.
The calculation of the taxable profit, applying the transitional exemption, is as follows:
- Total Profit = AED 10,000 - AED 5,000 = AED 5,000
- Excluded Profit/Loss = AED 7,000 - AED 5,000 = AED 2,000
- Taxable Profit = AED 5,000 - AED 2,000 = AED 3,000
Conclusion
Maximizing the transitional exemption's benefits requires a comprehensive grasp of its provisions. Given that the election in the first tax return is irrevocable and pivotal for long-term tax liability, consulting a tax advisor is highly recommended to optimize its utilization.
