The introduction of the UAE Corporate Tax regime has brought several important tax elections that can significantly affect a company’s tax liability and financial reporting. One of the most strategic elections available is the Realisation Basis Election, which determines whether unrealised gains and losses on certain assets and liabilities should be included in taxable income.
For businesses reporting under IFRS, understanding the interaction between this election and Deferred Tax Accounting (IAS 12) is essential. While the election can reduce current tax liabilities, it also creates important deferred tax implications that finance teams must carefully evaluate.
Understanding the Realisation Basis Election
Under the UAE Corporate Tax Law, taxable persons that prepare their financial statements using the accrual basis of accounting may elect to calculate taxable income using the realisation basis.
Without making this election:
- Unrealised gains and losses recognised in the financial statements generally form part of taxable income where required under the Corporate Tax rules.
With the election:
- Unrealised gains and losses are ignored for Corporate Tax purposes.
- Tax is imposed only when the gain or loss is actually realised through sale, disposal, settlement, or other taxable realisation event.
This election is particularly relevant for businesses holding:
- Investment properties measured at fair value
- Financial assets measured at fair value
- Certain equity investments
- Other assets subject to fair value accounting under IFRS
A One-Time and Generally Irrevocable Election
One of the most important aspects of this election is its permanence.
The election:
- must be made during the taxpayer’s first Corporate Tax period,
- is submitted through the Corporate Tax Return,
- generally becomes irrevocable, unless exceptional circumstances exist and approval is obtained from the Federal Tax Authority (FTA).
Consequently, businesses should evaluate both the short-term and long-term consequences before making the election.
Why Does This Election Matter?
Under IFRS, companies frequently recognise fair value changes before any cash is received.
For example:
An investment property purchased for AED 10 million may be revalued to AED 12 million at year-end.
Accounting treatment:
- Fair value gain: AED 2 million
- Profit before tax increases by AED 2 million
If no Realisation Basis Election is made:
- The AED 2 million may become taxable immediately (subject to applicable Corporate Tax rules).
If the election is made:
- The AED 2 million is ignored for tax purposes.
- Tax becomes payable only when the property is eventually sold or otherwise realised.
This improves cash flow because tax is not paid on unrealised “paper profits.”
Connection with Deferred Tax
Although the Realisation Basis Election reduces current tax, it often creates temporary differences between accounting profit and taxable profit.
These temporary differences fall within the scope of IAS 12 – Income Taxes, resulting in recognition of deferred tax assets or deferred tax liabilities.
Book Profit vs Taxable Profit
Assume:
| Particular | Amount (AED) |
|---|---|
| Fair value gain recognised under IFRS | 2,000,000 |
| Taxable gain (Realisation Basis elected) | 0 |
Accounting profit exceeds taxable profit by AED 2 million.
Although no current Corporate Tax is payable today, the gain will become taxable upon future disposal.
Therefore:
- Accounting basis exceeds tax basis.
- A Deferred Tax Liability (DTL) generally arises because tax has merely been postponed rather than permanently avoided.
This reflects the principle that future taxable profits will include amounts already recognised in accounting income.
Why Deferred Tax Liability Arises
IAS 12 requires companies to recognise deferred tax for temporary differences between:
- carrying amount of an asset or liability; and
- its tax base.
When a company elects the Realisation Basis:
- carrying amount reflects fair value,
- tax base continues to reflect historical taxable values until disposal.
The difference reverses when the asset is sold.
Therefore:
Current Tax
- Lower today
Deferred Tax
- Higher today
Future Tax
- Paid when the gain is realised
Economically, the tax is delayed—not eliminated.
Example
Suppose:
Investment Property
Cost: AED 5 million
Fair Value at Year End: AED 7 million
Corporate Tax Rate: 9%
Financial Statements
Gain recognised:
AED 2 million
Tax Return (Realisation Basis Elected)
Taxable gain:
AED 0
Current tax:
AED 0
Deferred Tax
Temporary difference:
AED 2 million
Deferred Tax Liability:
AED 180,000
(AED 2 million × 9%)
The financial statements therefore recognise:
- Current Tax Expense = Nil
- Deferred Tax Expense = AED 180,000
The tax payment occurs only when the property is sold.
Impact on Investment Properties
The election is particularly attractive for businesses holding investment properties measured at fair value under IFRS.
Without the election:
- yearly market appreciation could generate taxable income despite no cash being received.
With the election:
- annual fair value gains are deferred until disposal.
This significantly improves liquidity for property investment businesses.
Furthermore, the UAE Ministry of Finance introduced additional rules allowing eligible taxpayers that have elected the realisation basis to make a separate election for tax depreciation on investment properties held at fair value, subject to specified conditions.
Advantages of Electing the Realisation Basis
The election offers several practical benefits:
- No Corporate Tax on unrealised fair value gains.
- Improved cash flow management.
- Better alignment between tax payments and actual cash realisation.
- Reduced financing burden arising from taxation of unrealised accounting profits.
- Greater predictability for long-term investment assets.
Potential Drawbacks
The election also presents certain challenges:
- Deferred tax liabilities may increase.
- More complex tax reconciliations.
- Additional IAS 12 disclosures.
- Long-term tracking of temporary differences.
- The election is generally irrevocable, making initial planning critical.
Strategic Considerations Before Making the Election
Before electing the Realisation Basis, businesses should evaluate:
- The proportion of assets measured at fair value.
- Expected holding periods.
- Future disposal strategy.
- Cash flow requirements.
- Deferred tax implications.
- Investor reporting expectations.
- IFRS compliance requirements.
- Long-term Corporate Tax planning.
The decision should not be viewed solely as a tax-saving opportunity but as part of a broader financial reporting and tax strategy.
Conclusion
The UAE’s Realisation Basis Election is one of the most significant strategic elections available under the Corporate Tax regime. It allows businesses to defer taxation of unrealised gains until actual realisation, improving liquidity and preventing taxation of unrealised accounting profits.
However, this tax benefit does not eliminate tax altogether. Instead, it creates temporary differences that generally result in deferred tax liabilities under IAS 12. Businesses must therefore consider both the immediate cash flow benefits and the long-term financial reporting implications.
Given that the election is generally made only in the first Corporate Tax period and is ordinarily irrevocable, careful analysis is essential before making this decision. Companies with investment properties, financial instruments, or significant fair value adjustments should assess the interaction between Corporate Tax and deferred tax accounting to ensure the election aligns with their overall tax and financial reporting objectives.
How Prabix Can Help
Navigating the UAE Corporate Tax regime requires more than simply understanding the legislation—it requires making informed strategic decisions that align tax compliance with financial reporting objectives. The Realisation Basis Election can have significant implications for taxable income, cash flow, deferred taxation under IAS 12, and future tax planning. Making the wrong election, or failing to assess its long-term impact, may result in unnecessary tax costs or complex compliance challenges.
At Prabix, our team of experienced tax advisors, IFRS specialists, and corporate finance professionals provides comprehensive guidance to help businesses evaluate the benefits and implications of the Realisation Basis Election. We work closely with management to assess the impact on current and deferred tax, prepare tax computations, support financial statement reporting, and ensure compliance with the UAE Corporate Tax Law and applicable IFRS requirements.
Whether you are preparing for your first Corporate Tax return, reviewing your tax strategy, or seeking expert advice on deferred tax accounting, Prabix offers practical, commercially focused solutions tailored to your business. Our goal is to help you make confident tax decisions, remain fully compliant with regulatory requirements, and optimise your overall tax position through expert consulting and ongoing advisory support.
Contact Prabix today to discuss how our Corporate Tax and IFRS specialists can help your business navigate the complexities of UAE taxation with confidence.