Ministerial Decision on Adjustments under the Transitional Rules

The Cabinet of Ministers has issued Cabinet Decision No. 120 of 2023, effective from 1 June 2023 providing guidelines for adjusting a taxable person’s opening balance sheet under the Federal Decree Law No. 47 of 2022 (’the CT Law’).

1. The intent of the Decision is to provide a one-time relief to the Taxable Persons by providing transitional rules for excluding gains on assets that were held prior to the corporate tax regime.

1. The decision/ Relief applies to specific assets and liabilities that businesses held before implementing the corporate tax law when determining a Taxable Person’s taxable gains upon disposal of the below assets:
   1. Gains upon disposal of Immovable property(to be deemed as “Qualifying Immovable Property” in the event the below conditions are met);
   2. Gains upon disposal of Intangible assets(to be deemed as “Qualifying Intangible Asset” in the event the below conditions are met); and
   3. Gains and losses upon disposal of Financial assets and liabilities(to be deemed as “Qualifying Financial Asset” and “Qualifying Financial Liability” in the event the below conditions are met).

1. How adjustment/relief can be availed:
   1. A Taxable Person may elect to adjust their Taxable Income to the extent all of the following conditions are met in the context of Immovable Property and Intangible Assets:
   1. The assets are owned before the first Tax Period (i.e. prior to the Taxable Person’s first fiscal year);
   2. The assets are accounted for on a historical cost basis; and
   3. The assets are disposed of or deemed to be disposed of after the CT Law becomes effective for a Taxable Person for a value exceeding the net book value (i.e. for a profit).
   1. With regards to Qualifying Financial Assets and Qualifying Financial Liabilities, a Taxable Person may adjust their Taxable Income for the purposes of calculating the gains and losses on the satisfaction of the following condition:
   1. The assets are owned before the first Tax Period (i.e. prior to the Taxable Person’s first fiscal year);
   2. The assets are accounted for on a historical cost basis; and

   The election must be made upon the submission of the first Tax Return in respect of each Qualifying Immovable Property, all Qualifying Intangible Assets, and all Qualifying Financial Assets / Liabilities. The election is irrevocable except under exceptional circumstances.

1. How the gains will be computed:

   In the case of Qualifying Immovable Property 

   Gains recognized upon the disposal of a Qualifying Immovable Property subsequent to the application of the CT Law may be adjusted by using either of the following options:

   1. Option 1: Exclude the gains that would have arisen had the asset has been disposed of at the start of the first Tax Period. The amount of gain to be excluded is the difference between (1) and (2):

   (1) the Market Value (“MV”) of the asset at the start of the first Tax Period

   (2) the higher of the original cost and the net book value (“NBV”) of the asset at the start of the first Tax Period

   1. Option 2: The amount of gain to be excluded is calculated as (1) x (2):
   1. (Sales Proceeds at time of disposal of the asset) - (Higher of the original cost and the NBV at the start of the first Tax Period).
   2. (Number of days the asset is owned before the first Tax Period) / (Total number of days the asset is owned).

   In the case of Qualifying Intangible Assets

   The gains recognized on assets owned prior to the Taxable Person’s first Tax Period can be adjusted under the following method:

   1. The amount of gain to be excluded is calculated as (a) x (b):
   1. (Sales Proceeds at time of disposal of the asset) - (Higher of the original cost and the NBV at the start of the first Tax Period).
   2. (Number of days the asset is owned before the first Tax Period) / (Total number of days the asset is owned).

   However, the number of days the Qualifying Intangible Asset is owned before the first Tax Period cannot exceed 10 years.

   In the case of Qualifying Financial Assets and Qualifying Financial Liabilities

   A Taxable Person may exclude any gains/losses arising from the sale of Qualifying Financial Assets and Qualifying Financial Liabilities had such asset/liability has been disposed at Market Value with its NBV being its cost at the start of the first Tax Period.

1. Way forward
   1. The decision shall apply to specific assets measured on a historic cost basis.
   2. The decision is a type of relief on taxes in the future on gains inherent in assets held on the date of entry into the CT law.
   3. The election is to be made voluntary at the filing of tax returns for the first tax period.

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