Tax Deductibility of Unrealized Gains/Losses in case of Assets and Liabilities (Corporate Tax in UAE)

• Provisions of the UAE corporate tax Regulations • According to clause 3 of Article 20 of the Decree Law, a Taxable Person that prepares financial statements using the accrual basis may choose to treat 'Unrealized gains or losses' on a realization basis for the following scenarios: • Option 1: Unrealized gains or losses related to all assets and liabilities that are subject to fair value or impairment accounting – These are not taxable until they are realized. • Option 2: Unrealized gains or losses concerning assets and liabilities maintained solely on the Capital Account – These are also not taxable until realized. However, under this option, unrealized gains or losses on the revenue account will remain taxable in accordance with the accrual basis of accounting. • Clause 4 of Article 20 of the Decree Law, as referenced in the Explanatory Guide, presents a non-exhaustive list of items that should be classified as either capital account or revenue account. • 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 noncurrent 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 noncurrent liabilities. • Assets and liabilities held on revenue account” refers to assets and liabilities other than those held on a capital account. The assets and liabilities that have short-term impact on business such as trading stock and inventory. The clause specifically includes any gain or loss that arises as a result of changes in the value of foreign currency (such as reinstatement of outstanding debtor and creditor balances held in foreign currency at the end of Tax period at the prevailing foreign exchange rate) • Article 8 of the Ministerial Decision 134 of 2023, provides that a Taxable Person preparing Financial Statements on Accrual Basis may elect to recognize gains & losses on realization basis. The decision to make an election, or not to make an election, shall be made by the Taxable Person during the first Tax Period and said decision shall be deemed irrevocable, except under exceptional circumstances and pursuant to approval by Authority. • FAQ no. 231 on the UAE CT, provides that the corporate tax treatment of a revaluation loss depends on whether the Taxable Person has made an election to recognize gains and losses on a realization basis. If no election has been made, then the tax treatment should follow the accounting treatment. This means that revaluation gains and losses reflected in the accounts are subject to corporate tax in the relevant Tax Period. • Further reference is drawn to ‘corporate tax Guide - CTGACS1 - Accounting Standards and Interaction with corporate tax’, where it mentioned that an example of ‘unrealized loss/ gain would be the creation or release of a provision for a doubtful debt’