Depreciation of investment properties held at fair Value: Ministerial Decision No. 173 of 2025

Rationale

Under normal accounting rules (e.g. IAS 40), entities holding investment property can choose to measure it using either:

• The cost model (where depreciation is recorded), or
• The fair value model (where gains/losses are remeasured periodically and no depreciation is recorded in the books).

This creates a tension in tax law, particularly when unrealized fair value gains are not recognised, but no depreciation is claimed either.

Ministerial Decision No. 173 addresses this asymmetry by allowing depreciation even if a taxpayer elects to recognize gains and losses only upon realization.

Example 1

A building appreciates in value but isn’t sold. The entity uses the fair value model, so no depreciation is recorded. But since unrealized gains are also not taxable, the asset creates neither expense nor income, and the taxpayer bears a higher tax burden without ever receiving the associated economic benefit.

So, the depreciation deduction ensures tax results better align with economic substance.

The Ministerial Decision recaptures depreciation upon realization (i.e., sale or derecognition). This means:

• Deductions claimed over time will increase taxable income when the gain is realized, essentially deferring tax (not avoiding it).
• The tax base is preserved; timing is adjusted to match economic events rather than accounting treatment.

This preserves neutrality between fair value and cost accounting models in the long run.

The new regime respects the taxpayer's choice to use the fair value model for financial reporting.

Without this adjustment, taxpayers would be forced to adopt the cost model to get depreciation deductions.This would reduce comparability and transparency of financial statements and cause accounting-tax divergence. Allowing depreciation supports flexibility while maintaining a coherent tax framework.

Sectors such as real estate investment, REITs, and property holding companies often hold assets at fair value for external reporting, especially under IFRS.

These businesses might never recognize accounting depreciation under IAS 40 but still experience economic wear and tear or usage of assets. Denying depreciation would penalize fair value users and distort effective tax rates in the sector. The decision avoids putting real estate players at a structural disadvantage.

The realisation basis election allows taxpayers to defer recognition of fair value movements until a taxable event.

But if depreciation were denied, such entities would accumulate no deductions while also not recognizing unrealized income. This could result in an imbalanced tax base that overstates profitability. So, allowing depreciation restores balance and closes the policy gap introduced by the realization basis election.

On balance, the MoF's decision to permit depreciation for investment properties held at fair value is grounded in tax equity, neutrality, and economic realism. It:

Prevents distortion of taxable income for fair value users, ensures long-term tax symmetry by recapturing deductions upon realization, and

Respects both accounting standards and business model choices.

It’s a technical but important measure that enhances coherence in the UAE Corporate Tax framework, especially for asset-heavy industries.

Definition of Investment Property (narrower scope)

While the Ministerial Decision refers to Investment Property as defined in IAS 40, it introduces an important limitation for Corporate Tax purposes: it explicitly excludes land. This narrows the scope compared to the standard IFRS definition and has important implications for taxpayers.

Under IAS 40, both land and buildings (or parts thereof) can qualify as investment property if held to earn rental income or for capital appreciation (or both). This includes:

• Land held for long-term capital gain, even without rental activity.
• Properties under development for future investment use.
• Combined land and building components held for qualifying purposes.

However, under Ministerial Decision No. 173, the definition is restricted to buildings or parts of buildings, excluding land, even where land would otherwise qualify under IFRS. The definition reads: “An Investment Property shall not include land and any exclusions provided for in the International Accounting Standard No. 40”.

This narrower definition means that land will not qualify for depreciation deductions, even if held at fair value and used for investment purposes. Accordingly:

• Segregation of asset components will be essential, i.e. the taxpayers must allocate original cost between land (non-deductible) and buildings (eligible for depreciation).
• In mixed-use developments or plots with future construction potential, careful tax accounting and documentation will be required.
• Asset tracking and documentation will be necessary to demonstrate historical ownership and depreciation claims, especially during restructurings or group transfers.

Mechanics

The operative provisions set out in Articles 2 and 3 define who can elect the depreciation, how depreciation is calculated, and when the election must be made.

The framework is optional but irrevocable, and applies only if specific preconditions are met.

A taxpayer may elect to apply depreciation if it holds investment property measured at fair value. If these conditions are not met, the depreciation deduction cannot be applied.

Under Article 2(1), the depreciation deduction is the lower of:

• 4% of the Original Cost of the investment property (pro-rated for part-years or partial holding), or
• The Tax Written Down Value (TWDV)[1] at the beginning of the Tax Period.

[1] Defined as “the Opening Value less the aggregate depreciation deduction applied under Clause (1) of Article (2) of this Decision by the Taxable Person or transferor referred to in Clause (2) of Article (2) of this Decision”.

Election timing

The election must be made in the Tax Return for the relevant period. The timing rules are strict:

If the election is not made within the prescribed deadline, the taxpayer will permanently lose the right to claim depreciation on investment properties held at fair value.

Example 2: property held prior to CT Regime

ABC Real Estate LLC prepares IFRS financials using the fair value model and elects Article 20(3) for realisation-based taxation. It owns a building acquired on 1 July 2021 for AED 10 million.

• First Tax Period coved by Decision 173: 1 January – 31 December 2025
• Property held since mid-2021 →5 calendar years before 2025
• Opening Value: AED 10,000,000 – (4% × 3.5) = AED 8,600,000
• Depreciation in 2025: 4% × AED 10,000,000 = AED 400,000 (TWDV at start = 8.6M > 400k, so 4% of original cost is allowed)

If the taxpayer files the 2025 Tax Return without making the election, no depreciation can be claimed in subsequent periods.

Example 3: new property acquired mid-year

XYZ Holdings Ltd elects Article 20(3) and purchases a qualifying building for AED 5 million on 1 June 2026.

• Tax Period: Calendar year 2026
• Holding period: 7 months
• Depreciation: 4% × AED 5M × (7/12) = AED 116,667

Original Cost = Opening Value = TWDV = AED 5 million → So 116,667 deduction is within limits.

Election must be made in the 2026 Tax Return. If missed, depreciation cannot be claimed in any future year.

Example 4: entity exiting Small Business Relief

Delta REIT Ltd acquired a building on 1 January 2024 for AED 15 million. It elected Article 21 “Small Business Relief” for 2024, 2025, and 2026. It exits SBR in 2027, becoming subject to Corporate Tax for the first time.

Under Article 1(a) of Decision No. 173, the Opening Value is defined as the Original Cost reduced by 4% for each Gregorian calendar year during which the Taxable Person held the Investment Property prior to the first Tax Period in which Corporate Tax is imposed on a person that had previously elected for Article 21 to apply.

Since Delta REIT held the property during 2024–2026 (all years prior to 2027, when Corporate Tax is first imposed) the Opening Value must be reduced for each of those three years.

Opening Value calculation:

• Original Cost: AED 15,000,000
• Reduction: 3 years × 4% = AED 1,800,000
• Opening Value (2027) = AED 13,200,000
• TWDV at start of 2027 = AED 13,200,000
• 2027 depreciation deduction = lower of:
  • 4% of AED 16M = AED 600,000
  • TWDV = AED 13.2M

Therefore, the 2027 depreciation deduction is AED 600,000.

An election to apply depreciation must be made in the 2027 Tax Return. If the election is not made, the right to claim depreciation is permanently forfeited.

Key takeaway is that based solely on the statutory wording, the 4% annual reduction does apply for each year the property was held prior to the first taxable year (2027), even if those years were covered by Small Business Relief.

Why “Lower of 4% of Original Cost or TWDV”?

Pursuant to the MoF’s press-release issued on 19 May 2023 “a number of posts circulating on social media and other platforms that are issued by private parties, contain inaccurate and unreliable interpretations and analyses of Corporate Tax”.

The Ministry issued a reminder that official sources of information on Federal Taxes in the UAE are the MoF and FTA only. Therefore, analyses that are not based on official publications by the MoF and FTA, or have not been commissioned by them, are unreliable and may contain misleading interpretations of the law. See the full press release here.

You should factor this in when dealing with this article as well. It is not commissioned by the MoF or FTA. The interpretation, conclusions, proposals, surmises, guesswork, etc., it comprises have the status of the author’s opinion only. Furthermore, it is not legal or tax advice. Like any human job, it may contain inaccuracies and mistakes that I have tried my best to avoid. If you find any inaccuracies or errors, please let me know so that I can make corrections.

Example 5: TWDV is irrelevant in early years

As per Article 2(1), the depreciation deduction for investment property held at fair value is limited to the lower of:

• 4% of the Original Cost of the investment property (prorated if necessary), or
• The Tax Written Down Value (TWDV) at the beginning of the relevant Tax Period.

The “lower of” rule becomes relevant primarily when the property was acquired before the introduction of Corporate Tax and the Opening Value has been reduced under Article 1(a), causing the TWDV to start below the Original Cost. For other scenarios, the comparison with TWDV only ensures that the taxpayer discontinues further deductions once the TWDV reaches zero.

Indeed, if a property is newly acquired at the time Corporate Tax becomes applicable, the TWDV will equal the Original Cost. Since the depreciation deduction is fixed at 4% of Original Cost annually, and the asset is written down by that same amount, the TWDV remains higher than the annual deduction until the final year, making the “lower of” rule irrelevant until the end of the depreciation cycle.

Example 6: TWDV cap applies due to reduced Opening Value

Assume a property was acquired in 2010 for AED 2,000,000 and held for 15 years before Corporate Tax is introduced in 2025. Under Article 1(a), the Opening Value is reduced by 4% × 15 = 60%, resulting in:

• Opening Value / TWDV at start = AED 800,000
• 4% of Original Cost = AED 80,000

Now depreciation begins in 2025:

• Year 1: 80,000 allowed (TWDV = 800,000)
• Year 2: 80,000 allowed (TWDV = 720,000)
• …
• Year 10: 80,000 allowed (TWDV = 80,000)
• Year 11: TWDV = 0 → no deduction allowed

In this case, the “lower of” rule binds in year 11 because the property’s base had already been eroded under the mechanism prescribed by Article 1(a). It reduces the eligible cost to exclude the portion attributable to years before the new regime began. This scenario illustrates how the cap ensures that a taxpayer cannot claim depreciation under the new mechanism for the portion of the asset’s cost that relates to the period before 2025, even if no accounting depreciation was recorded during that time.

In this example, the disallowed portion amounts to AED 1,200,000, representing 60% of the original AED 2,000,000 cost, corresponding to the 15-year period during which the property was held before the application of Ministerial Decision No. 173.

Acknowledgements

I would like to extend my sincere thanks to CA Rishu Kedia, whose thoughtful comment on an earlier version of this article helped draw my attention to a critical technical point: that the depreciation deduction under Article 2(1) of Decision No. 173 is based on Original Cost, not on the Opening Value. Her input led to an important clarification in the treatment of depreciation for investment properties held at fair value.

I am also grateful to Ajit Antony, whose remarks highlighted the application of the rule in cases involving Small Business Relief (SBR). His observation that the Opening Value should be reduced by deemed depreciation for the years covered by an SBR election prompted a valuable refinement of the interpretation presented in this article.

Their contributions exemplify the value of open technical dialogue and collaborative interpretation in a developing tax system.

The disclaimer

Pursuant to the MoF’s press-release issued on 19 May 2023 “a number of posts circulating on social media and other platforms that are issued by private parties, contain inaccurate and unreliable interpretations and analyses of Corporate Tax”.

The Ministry issued a reminder that official sources of information on Federal Taxes in the UAE are the MoF and FTA only. Therefore, analyses that are not based on official publications by the MoF and FTA, or have not been commissioned by them, are unreliable and may contain misleading interpretations of the law. See the full press release here.

You should factor this in when dealing with this article as well. It is not commissioned by the MoF or FTA. The interpretation, conclusions, proposals, surmises, guesswork, etc., it comprises have the status of the author’s opinion only. Furthermore, it is not legal or tax advice. Like any human job, it may contain inaccuracies and mistakes that I have tried my best to avoid. If you find any inaccuracies or errors, please let me know so that I can make corrections.