FTA Public Clarification CTP009 on Valuation Method - A Structured Summary

Introduction:

The UAE's Corporate Tax transitional rules allow businesses to adjust their Taxable Income for gains on certain assets held before the tax came into effect. Specifically, for real estate, Article 2 of Ministerial Decision No. 120 of 2023 permits developers to elect to exclude the pre-tax period portion of a gain when they dispose of a "Qualifying Immovable Property."

There are two methods to calculate this exclusion: the valuation method and the time apportionment method. This Public Clarification focuses exclusively on explaining the application of the valuation method.

What is Immovable Property:

For real estate developers, any project, land, or building—whether completed or under construction—is classified as immovable property.

Conditions for Qualifying Immovable Property:

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:

a. The Immovable Property is owned prior to the first Tax Period.

b. The Immovable Property is measured in the Financial Statements on a historical cost basis.

c. 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.

Accordingly, real estate developers can consider the following asset categories as Qualifying Immovable Property:

• Land parcels acquired before the first Tax Period, where construction begins on or after that period. In this case, only the land itself qualifies, as it was the only project asset existing before the first Tax Period.

• Properties Under Construction
Qualifying Immovable Property includes projects where construction began before the first Tax Period and continues after it begins. In such cases, the entire project—comprising both the land and the structures under construction—is considered the Qualifying Immovable Property.

• Completed Projects
This category encompasses projects fully constructed before the first Tax Period that are sold, or intended for sale, after the period has commenced.

Understanding Disposal or Deemed Disposal of a Qualifying Immovable Property:

For Corporate Tax under Ministerial Decision No. 120 of 2023, a disposal or deemed disposal of a Qualifying Immovable Property occurs in the Tax Period(s) when its revenue and associated costs (including land and construction) are recognized in the income statement under the applicable accounting standard (IFRS or IFRS for SMEs).

This means that for off-plan property sales, where revenue and expenses are recognized over multiple periods, the disposal is accounted for progressively in each relevant Tax Period.

Gain Calculation under Valuation Method:

Gain = MV - [Higher of (OC, NBV)]

Where:

MV = Market Value at the start of the first Tax Period

OC = Original Cost at the start of the first Tax Period

NBV = Net Book Value at the start of the first Tax Period

Determining Market Value for Transitional Rules:

The starting point for Market Value is an assessment by a competent government authority (like the DLD in Dubai) or their accredited valuer.

However, this value often needs adjustments to qualify for the transitional rules. You must ensure the value only reflects the Qualifying Immovable Property. Which guide us to the Key adjustments may include:

1. Remove Sold Units: Deduct the value of any units sold before the first Tax Period.

2. Remove Retained Assets: Deduct the value of unsellable assets (e.g., communal areas kept by the developer that will not be disposed of to customers).

3. Adjust for Construction Status (partially completed or completed projects): For partially completed projects, maybe the MV not reflect its status, hence it need to be reduced from the "completed project" value down to its value in its partially competed state.

All adjustments must be made on a fair and reasonable basis.

Determining Original Cost & Net Book Value

Basis of Calculation: Includes all capitalized costs (land, construction, related costs), also known as Capital/Construction Work in Progress.

Value at cut-off: Use the Work in Progress value at the start of the first Tax Period, provided it has not been written down to net realizable value (i.e., inventory).

Important adjustment for Ongoing Projects:

• If revenue recognition for a project began before the first Tax Period, you must:

  • Identify the costs already expensed to the Income Statement.

  • Exclude these costs from the value of the Qualifying Immovable Property.

  • Use only the remaining, non-expensed costs for the transitional calculation.

Calculating the Transitional Adjustment (Valuation Method)

Follow this 4-step process to determine the excluded gain for each Tax Period:

1. Calculate the Overall Excluded Gain:
   (Market Value/Adjusted Market Value at Period Start) - (Higher of Original Cost or Net Book Value)

2. Identify the Gain to the Current Tax Period:
   Apportion the total gain from Step 1 based on the percentage of revenue recognized in this period (e.g., using IFRS 15 guidelines).

3. Identify the Relevant Accounting Profit:
   Determine the accounting profit for this period that comes from the Qualifying Immovable Property. If only part of a project qualifies, for example, where land was owned but construction had not started before the start of the first Tax Period, allocate the profit fairly.

   Key Rule in this step: If this calculation results in a loss, you cannot apply the adjustment for this Tax Period.

4. Apply the Adjustment:
   Use the allocated gain from Step 2 to reduce the profit from Step 3. Any portion of the gain that isn't used in this period cannot be carried forward to future Tax Periods.

Key Takeaways & Next Steps

In summary, successfully applying the valuation method depends on three key actions:

1. Obtain an Official Valuation: a competent authority or their accredited valuer.

2. Apply Necessary Adjustments: Ensure the value is adjusted fairly for pre-period disposals, retained assets, and construction progress.

3. Follow the 4-Step Calculation: work through the steps of calculating the overall gain, apportioning it, and applying it against your accounting profits.

Failure to do this correctly can lead to forfeiting potential tax benefits.

For a complete review of the official guideline, download the full document here:

Click to Download the Full FTA Public Clarification CTP009 (PDF)

We recommend seeking professional advice to implement these rules for your specific projects.

Need help understanding your UAE CT obligations? Contact Assure Gate Tax & Accounts for expert guidance tailored to your business.