Depreciation Adjustments for Investment Properties Held at Fair Value

Depreciation Adjustments for Investment Properties Held at Fair Value
 

The UAE Ministry of Finance has introduced Ministerial Decision No. 173 of 2025 which is applicable from 1st January 2025, purpose of the same is to clarifying the Corporate Tax treatment of depreciation for investment properties measured at fair value under the International Accounting Standards (IAS). 
This decision provides a standardized approach to align with the provisions of the UAE Corporate Tax Law (Federal Decree-Law No. 47 of 2022), applying the fair value model in their financial reporting.

What is the Purpose of the change?

This change is more relevant for taxable persons in the real estate sector, i.e. property owners, developers, and investment companies holding assets for rental income, capital appreciation, or a combination of both. Where the land is specifically excluded from the scope of investment property for these purposes.
As per IAS 40 – definition of Investment Property provides, entities have the option to measure investment properties 1) At cost, or 2) At fair value, where the fair value model reflects the market value only, earlier to the decision there was a gap for Corporate Tax purposes, since no accounting depreciation is recorded. 
Ministerial Decision No. 173 of 2025 is filling this gap by allowing a depreciation adjustment to be applied, ensuring a fair and consistent basis for calculating taxable income.

While fair value accounting reflects only the current market values, it does not allow a depreciation charge on such investment property in the financial statements. For Corporate Tax purposes, however, the UAE Ministry of Finance has now introduced a mechanism to adjust taxable income by applying a depreciation deduction.

1. What is it?

Taxpayers who account on an accrual basis and elect to recognise gains and losses on a realisation basis (under Article 20(3) of the Corporate Tax Law) can make an irrevocable election to claim depreciation on investment properties held at fair value.
Once made, the election applies to all investment properties held at fair value by the taxpayer.

2.How to Calculate Allowable Depreciation Deduction – 

The allowable depreciation deduction will be the lower of:

• 4% of Original Cost, (where original cost refers to - The acquisition cost (plus capitalised costs) per IAS 40) for each 12-month tax period (pro-rated for shorter periods or partial ownership); or
• Tax Written Down Value at the start of the period. 
• (Tax Written Down Value (TWDV) – Opening value (which refers to - Original cost reduced by 4% per year for each year the property was held before the applicable tax period) minus accumulated depreciation claimed under this decision.)

3.Timeline for Making the Election

The election must be made in the tax return for:

• The first tax period to which this decision applies, if the taxpayer already holds investment property;
• The period in which the first investment property is acquired, if not already held;
• The first period in which Article 21 no longer applies for taxpayers who previously elected that treatment.

Miss the deadline? You forfeit the right to elect.

4.Treatment upon Realisation

When a realisation occurs, the taxpayer’s taxable income will be increased by the total depreciation deductions claimed on that property. This ensures that the deductions taken over the holding period are effectively reversed upon sale or disposal. 

As per the decision realization could said in following cases - 

• Sale, disposal, transfer (unless tax-neutral under Articles 26 or 27), derecognition, or complete worthlessness;
• Switching from the fair value model to the cost model;
• Becoming an exempt person or electing Article 21;
• Cessation of business.

5.Transfers between Related Parties or Within Tax Groups

Transfers covered under Articles 26 or 27 of the Corporate Tax Law (tax-neutral) will require the transferee to adjust taxable income to exclude depreciation previously claimed by the transferor.
Upon eventual realisation, the transferee must bring back and make adjustment into taxable income for the amounts previously excluded from the taxable income of transferor in form of dividend.

6.FTA can make Adjustment – (Anti-Abuse Provision)

It is really important to keep valid commercial purpose, if an investment property is transferred between related parties, In case there is any adjustment which is taking unnecessary benefits of the law the Federal Tax Authority may disallow the depreciation deduction.

Conclusion - 

• Real estate investors using the fair value model now have a clear path to claim a tax-deductible depreciation adjustment.
• The rules ensure that gains and losses are only taxed on realization while providing an annual tax relief mechanism.
• Businesses must carefully track Original Cost, Opening Value, and TWDV to ensure correct depreciation calculations and compliance with election timelines.

To learn more about Depreciation Adjustments for Investment Properties Held at Fair Value, book a free consultation with one of the Flyingcolour team advisors.

Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.