FTA clarified how real estate developers could adjust pre-tax-period gains under transitional corporate tax rules.
Regfollower Desk
The UAE Federal Tax Authority (FTA) has issued Corporate Tax Public Clarification CTP009, providing guidance on applying transitional rules for real estate developers who are Taxable Persons under the UAE corporate tax regime.
The clarification focuses on the disposal of Qualifying Immovable Property (QIP) and allows adjustments to exclude gains or losses attributable to periods before the corporate tax regime began.
The guidance focuses on the valuation method for calculating the excluded gain attributable to the pre-Corporate Tax ownership period of a QIP, often a real estate project or land. It details a four-step methodology for determining this excluded gain, which is used to adjust accounting profits, and clarifies that the excluded gain cannot be carried forward if it exceeds the accounting profit in a given Tax Period.
The clarification also defines Qualifying Immovable Property for developers, providing examples of when land or a project under construction meets the necessary conditions for the adjustment, and includes detailed examples to illustrate the calculation of excluded gains.
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.
