Key Considerations for Property Investors in the UAE
Property investors in the United Arab Emirates (UAE) who are planning to sell their assets need to make important decisions regarding their tax obligations. This is especially relevant as they must decide whether to record the current market value of their properties in their tax records or stick with the original purchase price. These choices must be applied to all properties during the first tax period starting on January 1, 2025. Investors will need to submit their tax returns by September 2026.
For those holding a single property or multiple properties, it’s essential to determine which valuation method offers the most benefit. The decision can significantly impact the amount of corporate tax they pay when selling.
Understanding the 4% Annual Depreciation Rule
A recent change in UAE tax policy allows property investors to claim a 4% annual depreciation on investment properties. This means that if a property is recorded at its original purchase price, the investor does not qualify for the depreciation benefit. However, if the property is valued at its current market value, the depreciation can be applied each year.
This rule has practical implications for investors. For instance, consider a property purchased for Dh1 million and sold for Dh3 million after five years. If the investor chooses to use the current market value, they can depreciate 4% of the Dh3 million annually for five years. At the time of sale, they would then pay 9% corporate tax on the net gain.
Alternatively, if the investor continues to report the property at the original purchase price, they would have to pay 9% corporate tax on the full difference between the purchase and sale prices.
Expert Insights on Valuation Choices
Sameer Lakhani, Managing Director of Global Capital Partners, highlighted the benefits of recording real estate assets at fair value. He explained that this approach aligns with international standards, allowing investors to depreciate their properties accordingly. Investors can choose the most advantageous option, provided they declare their choice upfront as required by the Federal Tax Authority (FTA).
For example, an investor who bought a two-bedroom townhouse at The Springs in 2002 for Dh400,000 might now see its value rise to Dh3.3 million or more. The decision to record the property at its original cost or at its current market value depends on the investor’s intention to sell. The new UAE rule provides a significant advantage for those with substantial gains, such as buying low and selling high.
UAE Ministry’s Position on Property Depreciation
The UAE tax authority has outlined specific rules for depreciation deductions. The available deduction is the lower of either the tax written down value of the investment property or 4% of the original cost. This applies to each 12-month tax period during which the property is held. The depreciation benefit is available to taxpayers who own investment properties before and after the introduction of corporate tax.
Tosif Sheikh, Partner at Finexpertiza UAE, noted that many clients have opted for fair valuation. He emphasized that the choice of market or fair value must be made in the first year of assessment. Investors with large property portfolios in the UAE stand to benefit the most from this option.
According to Sheikh, the current corporate tax treatment represents a balanced and equitable approach for taxpayers. The allowance of depreciation deductions enables property investors to access tax relief while deferring tax on unrealised gains until the property is sold. This provides a flexible and strategic way for investors to manage their tax liabilities effectively.
