Skip to content

Treatment of Unrealized Gains and Losses Under UAE Corporate Tax

For calculating taxable income under the UAE Corporate Tax law (the tax law), general rules for determining taxable income- defined under Article 20 of the Corporate Tax Law (CT law) are to be considered. According to Article 20 (2) of the CT law – taxable income for a tax period shall be accounting income subject to specific adjustments of the nine adjustments defined under Article 20 (2), the first adjustments is for - any unrealized gains or losses under UAE Corporate Tax.

In this article, we will see, how unrealized gains and losses are treated and how they impact the computation of Taxable income. And for that matter, we will first understand the Terms ‘Unrealised Gain /Unrealised Loss'

What are an Unrealized Gains or Losses Under UAE Corporate Tax?

Let’s have a look at unrealized gains and losses specifically:

Unrealized Gains:

In simple terms, the gains which have not yet been realized in cash are known as unrealized gain.

An unrealized gain is an increase in the value of an asset or investment, which has not been realized in cash and it becomes realized gains when such asset or investment is being sold.

Unrealized Losses:

The losses which has not yet been suffered or occurred is known as unrealized loss.

An unrealized loss is a decrease in the value of an asset or investment, which has not been realized in cash and it becomes a realized loss when such asset or investment is being sold.


Following accounting items can be referred to as unrealized gain/loss:

When to Record the Unrealised Gains or Losses Under UAE Corporate Tax in Financial Statement?

While computing taxable income for the relevant tax period, a taxable person who prepares their financial statements using the accrual basis of accounting may elect to take into account gains and losses on a realization basis in relation to:

A taxable person, other than a bank or insurance provider, that prepares financial statements on an accrual basis of accounting, may elect to consider, gains and losses on a realisation basis. The election for the realisation basis must be made by the Taxable Person during the first Tax Period which practically will be at the time of submitting the first Tax Return. The election to use the realisation basis is irrevocable. However, it may be revoked under exceptional circumstances and pursuant to approval by the FTA.

Option I: Accounting of Assets/Liabilities as per Fair Value Method

Gains and losses incurred with respect to the assets and liabilities which are valued at their fair value or impairment accounting as per the applicable accounting standards shall not be taken into consideration while calculating the Taxable Income.

Unrealised Gain:

For assets categorized as capital items (property, plant & equipment, long-term debt) the unrealized gains will not be taxable until they are realized actually (Ex. At the disposal of assets or investments)

Unrealised Loss:

Taxable person cannot claim a tax deduction for unrealized losses on capital items under UAE tax law. The deduction benefit only applies to realized losses when you sell the asset or investment. That means, loss on revaluation of assets that can occur due to decrease in the value of the asset, cannot be claimed as deduction as there is no actual economic loss.

And the actual loss incurred at the time of sale of assets will be allowed as deduction while computation of Taxable Income.

Option II: Assets and liabilities held in Capital Account

Unrealized Gains and losses under UAE corporate tax incurred with respect to all assets and liabilities that are held on the Capital Account, at the conclusion of a Tax Period shall be considered while calculating the Taxable Income and all unrealized gains or losses attributable to assets and liabilities that are kept on the revenue account, at the end of the Tax Period shall not be considered while calculating the Taxable Income.

As per Clause 4 Article 20 of the UAE CT Law,

“Assets held on capital account” refers to assets that the Person does not trade, assets that are eligible for depreciation, or assets treated under applicable accounting standards as property, plant and equipment, investment property, intangible assets, or other non-current assets.

“Liabilities held on capital account” refers to liabilities, the incurring of which does not give rise to deductible expenditure under Chapter Nine of this Decree-Law, or liabilities treated under applicable accounting standards as non-current liabilities

In this case, only unrealized gains/loss held in the Capital Account will not be taxable till they are realized. But the unrealized gains/loss in respect of the Revenue Account will be taxed on accounting basis that is being followed by the Taxable Person.

Adjustments allowed to be made under these methods:

As per ministerial decision No. 134 of 2023, In case a Taxable Person that prepares financial statements on an accrual basis may elect to take into account gains and losses on a realisation basis in relation to all assets and liabilities that are subject to fair value or impairment accounting and assets/liabilities held on capital account under the applicable accounting standards, the following adjustments shall be made:

Upon realisation of the assets and liabilities, include the unrecognised gains or loss, excluding those that arose before the most recent acquisition of assets/liability by a mode other than not considered as transfer within a qualifying group or business restructuring relief.

Case Study for Treatment of Unrealised Gains and Losses Under UAE Corporate Tax

This case study covers the important aspects of unrealised gains and losses under UAE Corporate tax taking the example of UAE resident companies.

Fair value gain on Building

During the Financial Year ending 31 December 2024, an LLC, a UAE resident company, recognised a revaluation gain in its financial statements of AED 1,000,000 in respect of some building which is measured at fair value.

The original cost of the building was AED 4,000,000 and after making the revaluation the net book value of the land is AED 5,000,000. The land was not sold at the end of the tax period and, therefore, the revaluation gain is considered ‘unrealised.’

Treatment in the books

If no election is made

An LLC would be subject to tax on the unrealised gain of AED 1,000,000 in relation to the Tax Period ending on 31 December 2024.

If election is made

However, if an LLC elects to apply the realisation basis in respect of all assets and liabilities that are subject to fair value or impairment accounting, then the company would not have to include the revaluation gain of AED 1,000,000 when calculating their Taxable Income for this Tax Period.

Provision for Doubtful debt

During the Financial Year ending 31 December 2024, B LLC, a UAE resident company, has created a provision for doubtful debt of AED 100,000 in the books of accounts and charged the same to the Profit & Loss statement in its Financial Statements in respect of an accounts receivables. Due to this effect accounting income came down by 100,000. The total outstanding Accounts receivable was AED 500,000, and after giving effect to the provision for doubtful debt the net book value of the A/R is AED 400,000.

Treatment in the books

If the bad debt has not been occurred at the end of the Tax Period, the provision for doubt full debt of AED 100,000 is considered as ‘unrealised’ and will not affect the taxable income of B LLC (Won’t be allowed as a deduction from Taxable Income).

It will only be taken into account (Would be allowed as deduction) as and when the bad debt kind of scenario actually occurred.

Conclusion

The treatment of unrealized gains or losses under the UAE Corporate Tax Law significantly impacts the computation of taxable income for businesses.

So, understanding of the unrealized gains and losses under UAE corporate tax is crucial as they represent changes in asset values that have not yet been realized in cash.

UAE Corporate Tax law provides options for accounting for these gains and losses, either through the fair value method or by considering assets and liabilities held in capital accounts. The decision to make an election regarding the realization basis must be carefully considered, as it can have long-term implications and is generally irrevocable except under exceptional circumstances.

Taxable persons must analyse the benefits and drawbacks of each option to determine the most advantageous approach for their specific circumstances. Furthermore, seeking professional assistance from tax consultants can greatly facilitate the process of calculating taxable income, ensuring accurate classification of assets, and smooth operations while minimizing errors.

Ultimately, a thorough understanding of the treatment of unrealized gains and losses is essential for businesses to comply with UAE tax regulations and optimize their tax liabilities.

Leave a Reply

Your email address will not be published. Required fields are marked *