Hey there! Let’s chat about how businesses can choose to use the realisation basis for calculating their taxable income under the UAE Corporate Tax Law.
What is the Realisation Basis?
In simple terms, the realisation basis allows businesses to exclude unrealised gains and losses from their taxable income. Instead, these gains and losses are only considered when the asset or liability is actually sold or disposed of. This can be really useful for businesses that prepare their financial statements using the accrual basis of accounting.
How Does It Work?
If you decide to elect the realisation basis, here’s what happens:
- Exclude Unrealised Gains and Losses: Any changes in the value of a non-financial asset that aren’t realised (i.e., the asset hasn’t been sold or disposed of) are excluded from your taxable income.
- Exclude Changes in Value of Liabilities and Financial Assets: Similarly, any unrealised changes in the value of liabilities or financial assets are excluded until they are realised.
- Include Realised Amounts: When you finally sell, dispose of, transfer, settle, or write off the asset or liability, you include any amounts that were previously excluded.
Practical Examples
Example 1: Fair Value Gain on Land
C LLC, a UAE resident company, owns some land. By the end of the financial year, the land’s value increased from AED 50,000,000 to AED 60,000,000, giving a revaluation gain of AED 10,000,000. If C LLC doesn’t elect the realisation basis, they’ll have to pay tax on this AED 10,000,000 gain even though they haven’t sold the land. But if they elect the realisation basis, they won’t include this gain in their taxable income until they actually sell the land.
Example 2: Loss Below Original Cost
S LLC, another UAE resident company, has an asset that originally cost AED 250,000. By the end of the financial year, the asset’s value dropped to AED 200,000, resulting in an unrealised loss of AED 50,000. Without the realisation basis election, S LLC would need to include this loss in their taxable income calculation. But with the election, they can exclude this unrealised loss until they sell the asset.
How to Elect the Realisation Basis
The decision to elect the realisation basis must be made in the first tax period and is generally irrevocable. This means once you choose it, you can’t change it unless there are exceptional circumstances and you get approval from the Federal Tax Authority (FTA). If you don’t make the election in the first tax period, it’s considered an irrevocable decision not to use the realisation basis.
How Fastlane Can Help
Navigating these tax elections and ensuring compliance can be complex. That’s where Fastlane comes in. We offer ‘Smart Compliance’ solutions to help you manage your corporate tax obligations smoothly.
Our services include:
- Advising on the best tax election options for your business.
- Handling all the necessary paperwork and compliance requirements.
- Keeping track of realised and unrealised gains and losses for accurate tax filings.
With Fastlane, you can focus on growing your business while we take care of the intricate details of corporate tax compliance. Schedule a free consultation with us to see how we can help your business thrive in the UAE.
