The introduction of UAE Corporate Tax brought transitional provisions to ensure that gains generated before the Corporate Tax regime are not unintentionally taxed after the regime became effective. One important relief available to real estate developers is under Ministerial Decision No. 120 of 2023, which provides transitional rules for Qualifying Immovable Property.

1. What are Transitional Rules?

Transitional rules are provisions introduced to separate profits earned before Corporate Tax became applicable from profits earned afterwards.

For real estate developers, this means that under certain conditions, a portion of the gain relating to property value created before the first Corporate Tax period may be excluded from taxable income.

2. Qualifying Immovable Property

Property that satisfies the conditions under the transitional rules and qualifies for adjustment calculations. This may include:

• Entire real estate projects, or
• Specific units within a project.

Example:
A developer owns land before Corporate Tax starts and later develops villas. The land portion may qualify for transitional adjustment.

3. Disposal / Deemed Disposal

For Corporate Tax purposes, disposal occurs when revenue and related costs are recognised in the financial statements under IFRS or IFRS for SMEs, not necessarily when the sale agreement is signed.

Example:
A developer signs an off-plan sale agreement in 2023 but recognises revenue over 2025–2026 under percentage of completion. The disposal is treated as occurring when revenue is recognised.

Two Methods Available Under the Transitional Rules

Ministerial Decision No. 120 of 2023 allows calculation using:

• Valuation Method, or
• Time Apportionment Method.

This article focuses on the Valuation Method.

How the Valuation Method Works

Under the valuation method:

Excluded Gain = Market Value − Higher of Original Cost or Net Book Value

The market value should be determined at the start of the first tax period.

Components considered:

• Land cost
• Construction cost
• Capital work in progress (where applicable)

Who Can Determine Market Value?

The market value must generally be determined by the relevant UAE government authority or an authorised valuer approved by that authority.

Examples:

• Dubai – Dubai Land Department (DLD)
• Abu Dhabi – Department of Municipalities and Transport (DMT)

Values prepared by unauthorised parties may not be accepted for transitional adjustment purposes.

Important points:

• Revenue recognition timing matters more than agreement signing date.
•  Transitional adjustment is calculated separately for each qualifying property or unit.
• If part of the project was already recognised before the first tax period, that portion may not qualify.
• Any excess excluded gain cannot be carried forward to future tax periods.

Treatment of Work in Progress (WIP)

Real estate developers often carry:

• Land cost
• Construction cost
• Development expenditure
• Capital Work in Progress (CWIP)

The guidance allows work in progress existing at the start of the first Tax Period to form part of original cost and net book value where conditions are satisfied.

However:

If costs were already recognized in profit and loss before the first Tax Period, that portion may no longer qualify for transitional adjustment.

Situations Where Adjustments May Be Required

Market values may need adjustment where:

Scenario 1 – Partial Disposal Before Tax Period

If part of a project was sold or recognised before the first Tax Period, the market value should exclude that portion.

Scenario 2 – Common Areas Retained by Developer

Projects may include:

• Clubhouses
• Corridors
• Shared facilities
• Common areas

If these areas are retained and not sold to customers, they should generally be excluded from valuation calculations.

Scenario 3 – Partially Completed Projects

Where valuation assumes completed construction but the project was incomplete at the start of the Tax Period, reasonable adjustments should be made to reflect actual completion status.

Step-by-Step Calculation Process

The guidance outlines four broad steps.

Step 1 – Calculate Overall Excluded Gain

Determine:

Market Value
Less: Higher of Original Cost / Net Book Value

Result = Excluded Gain

Step 2 – Allocate Gain

Allocate excluded gain based on revenue recognition methodology such as:

• IFRS 15
• Percentage of Completion Method

Step 3 – Determine Accounting Profit

Identify accounting profit attributable to qualifying property.

If only part qualifies, allocation must be reasonable and supportable.

Step 4 – Apply Adjustment

Use excluded gain to adjust accounting profit.

Important:
Unused excluded gain cannot be carried forward to later periods.

Practical Example

Assume:

Land purchased in 2020 → AED 20 million
Estimated development cost → AED 20 million
Total project cost → AED 40 million
20 townhouses planned
Sale price per townhouse → AED 4 million

At the start of the first Tax Period:

Market value of land (based on DLD valuation) → AED 30 million.

Step 1 – Identify What Qualifies

At the beginning of the tax period:

✔ Land already existed
✘ Construction had not started yet

Therefore:

Only the land portion qualifies for transitional adjustment.

Step 2 – Calculate Increase in Value Before Corporate Tax

Formula:

Excluded Gain = Market Value − Original Cost

Calculation: AED 30 Million− AED 20 Million = AED 10 Million

This AED 10 million represents the increase in land value before Corporate Tax started.

Step 3 – Construction and Sales Begin

During the next year:

• Construction starts.
• Company sells 15 villas.
• Revenue is recognized based on construction progress under IFRS 15.

Assume project completion = 20%

Recognized revenue: 15 × AED 4M × 20%  = AED 12 Million

Recognized cost:      15 × AED 2M × 20% = AED 6 Million

Accounting Profit:    AED 12M − AED 6M = AED 6 Million

Step 4 – Apply Transitional Relief

Company compares:

Since excluded gain is available:

Taxable Profit: AED 6million − AED 6 million= Nil

Result:

Although accounting profit exists, Corporate Tax profit becomes zero because the recognised gain relates to value created before Corporate Tax.

Key Takeaways for Developers

✔ Review projects held before the first Corporate Tax period.
✔ Analyse whether qualifying immovable property exists.
✔ Obtain authorised market valuation.
✔ Align calculations with IFRS revenue recognition.
✔ Maintain supporting documentation for FTA review.
✔ Consider project-level and unit-level elections carefully.