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Taxation of Unrealised Gains or Losses under UAE Corporate Tax +91-9667714335 - YouTube
Channel: International Taxation - Sorting Tax Advisory
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So the next point, which is relevant and聽
which has been provided in the UAE proposed聽聽
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law. Is that, what about the聽
unrealized gains or losses?聽聽
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Just to give you an example, what exactly聽
is unrealized gains or losses? Suppose聽聽
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there is a person who bought a property on 1, 1聽
20 20 for 1 million, zero. He continues to own it.
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And on 31, 12, 20, 24, lets the value of聽
this property is 1.5 million minimums.聽聽
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So if you actually see there is a gain that聽
this person has. So if he sells the property,聽聽
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he gets this money and he owns聽
again of how much, 500,000聽聽
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Dirhams. However, because he has not sold the聽
property. The gains have not been realized.
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These are unrealized gains. These聽
unrealized gain may actually be under聽聽
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different accounting rules, be required聽
to restate it. So let's say if this聽聽
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person had a balance sheet and on balance聽
sheet, there was an asset of 1 million.
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On the date of acquisition, the law may聽
require them to restate this to 1.5 million.聽聽
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And the moment he does this, he has to book a聽
gain of 500,000 in the profit and loss account.聽聽
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Now because the profit and loss account is聽
taken as the starting point for calculating聽聽
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the taxable income. The question which聽
comes up is that should this gain聽聽
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be considered as income and therefore聽
it should be liable to corporate tax.
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This is the provision, which we are going聽
to now see. So what are unrealized gain? I聽聽
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think what I explained to you a little earlier聽
explains it, that gain was in respect, offer聽聽
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capital asset. Why? Because聽
the asset was a building or a聽聽
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piece of real estate. As we spoke about the聽
same thing can also happen in respect of stocks.
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So you bought a stock when it was, let's say a聽
D 10 per unit on 31st of December, it increased聽聽
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to a D 12 per unit. So basically the question is,聽
again, will this two, a D be offered to tax? Not.
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So under the draft public consultation document,聽
it has been provided that specific rules will be聽聽
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prepared under the UAE law to determine the聽
tax treatment of unrealized gain or losses.聽聽
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Once the law is issued, then聽
these thing will be available.聽聽
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Rules would cover whether game or loss is聽
related to a capital item or revenue item.
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So the tax treatment of a capital item is聽
generally different from a revenue item. Now,聽聽
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what do you mean by either of these two is聽
something we will see in the next slide,聽聽
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but as a general rule unrealized gain聽
or capital item is not subjected to.聽聽
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Whereas this may not be necessary true in respect聽
of revenue items, but that's a general rule.
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Now, what is there under the UA corporate law聽
in respect of this is something let's see.
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So the gains can be in the nature of capital.聽
When are they considered as capital when they聽聽
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have a long term impact on business? So for聽
example, An asset long term capital asset might聽聽
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be a machinery. You purchase a machinery for聽
1 million zeros. The value rises to 2 million聽聽
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zeros. There is an unrealized gain of 1 million聽
now because the machinery is a long term asset.
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Therefore the increase is a capital聽
item. Second is a long term. Now again,聽聽
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for example, there was a loan that聽
was taken for 5 million minimums聽聽
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now because of certain reasons the banks agree聽
that okay, instead of five, you have to pay聽聽
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4 million only. And there's聽
a reduction in liability by聽聽
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1 million. If the loan is restated, this 1 million聽
may find its way to the profit and loss account.
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These are the items which have long term聽
impact and therefore they are considered as聽聽
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capital items. The second one is a revenue item.聽
Revenue item are the ones which are other than the聽聽
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capital item, for example, stock of goods.聽
So basically in case of stock of goods,聽聽
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there might be an increase or a聽
decrease in the value of the stock.
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So, how does the tax treatment for聽
these two categories work? Generally,聽聽
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the unrealized gain on account of capital assets聽
are not considered as a part of taxable income.聽聽
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And this is also what is suggested聽
in the draft public consultation聽聽
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document. On the other hand, the聽
unrealized gain on revenue items聽聽
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will be considered and taken into account聽
while calculating the taxable income of thee.
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So if there are any revenue items due聽
to which there is a game which arises,聽聽
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and it is booked in the profit and loss聽
account, when calculating taxable income,聽聽
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it will not be excluded from the profit聽
side, which means that there will be tax聽聽
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payable on this account. Of course, like I聽
mentioned in the proceeding slide, the rules,聽聽
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the detailed rules relating to this is something聽
which is going to be issued and therefore one聽聽
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will need to look out for those rules to figure聽
out whether that income is taxable or otherwise.
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