FOREX gain and losses from remeasurement of cash and bank balances: can the realisation basis be elected?

Facts

A UAE Taxable Person maintains cash and demand deposits denominated in multiple foreign currencies. These monetary items are retranslated into the functional currency (AED) at each reporting date, giving rise to unrealised foreign exchange gains and losses that are recognised in profit or loss for accounting purposes.

Question

Can the Taxable Person, under Article 20(3) of the UAE Corporate Tax Law, elect to apply the realisation basis in order to defer the recognition of these unrealised foreign exchange gains and losses?

Summary

Following a review of the applicable legislation and guidance, we find that:

1. FX differences may be deferred until realisation in respect of assets and liabilities held on both revenue and capital accounts. However:
   1. For revenue account items, deferral is permitted only where such assets or liabilities are subject to fair value or impairment measurement under the applicable accounting standards.
   2. For capital account items (for example, for related loan or amounts payable to the suppliers or contractors), FOREX differences may be deferred even if such assets or liabilities are accounted for at historical cost.
2. Cash and bank balances are neither capital account items nor subject to impairment or fair value measurement. Accordingly, foreign exchange differences on these items cannot be deferred under the realisation method of tax accounting and must be recognised as they arise.
3. A different approach may potentially be supported by the FTA in the future. However, in the absence of explicit confirmation through private or public clarifications, it appears risky to apply the realisation method of accounting to cash and bank account balances.

Analysis

According to Article 20(3) of the Corporate Tax Law, “… a Taxable Person that prepares financial statements on an accrual basis may elect to take into account gains and losses on a realisation basis in relation to:

• all assets and liabilities that are subject to fair value or impairment accounting under the applicable accounting standards; or
• all assets and liabilities held on capital account at the end of a Tax Period, whilst taking into account any unrealised gain or loss that arises in connection with assets and liabilities held on revenue account at the end of that period”.

Article 20(4) sets forth that “for the purposes of paragraph (b) of Clause 3 of this Article:

• “Assets held on capital account” refers to assets that the Person does not trade, assets that are eligible for depreciation, or assets treated under applicable accounting standards as property, plant and equipment, investment property, intangible assets, or other non-current assets.
• “Liabilities held on capital account” refers to liabilities, the incurring of which does not give rise to deductible expenditure under Chapter Nine of this DecreeLaw, or liabilities treated under applicable accounting standards as noncurrent liabilities.
• “Assets and liabilities held on revenue account” refers to assets and liabilities other than those held on a capital account.
• An “unrealised gain or loss” includes an unrealised foreign exchange gain or loss”.

Accounting treatment of cash and bank balances

The central issue in this case concerns whether unrealised foreign exchange differences on cash and bank balances may be deferred under the realisation basis election provided by Article 20(3) of the UAE Corporate Tax Law. The analysis requires an interpretation of both the accounting standards that govern the recognition of such differences and the legislative design of Article 20, including its subsequent elaboration in the Federal Tax Authority (FTA) guidance.

Under IFRS, cash and bank balances denominated in a foreign currency are classified as monetary items. In accordance with IAS 21 “The Effects of Changes in Foreign Exchange Rates”, such items are translated at the closing exchange rate at each reporting date, with the resulting gains and losses recognised immediately in profit or loss. These differences do not arise from the application of IFRS 13 “Fair Value Measurement”, which addresses valuation on the basis of market exit prices, nor from IAS 36 “Impairment of Assets”, which concerns the recoverability of asset values. Instead, the accounting driver is a mandatory retranslation mechanism designed to ensure consistency of financial statements in the functional currency.

Thus, by their nature, cash and bank balances are not “subject to fair value or impairment accounting”. They are remeasured solely due to currency translation rules. This distinction is significant, as Article 20(3)(a) permits deferral only in relation to assets and liabilities that are subject to those specific accounting treatments.

Article 20(3)(a) and (b): scope of the realisation basis

It is expedient for the purpose of this analysis to discern the legislative intent behind Article 20(3)(a) and (b). The provision creates two distinct categories under which a taxpayer may elect to defer unrealised gains and losses until realisation:

1. Paragraph (a) applies to assets and liabilities subject to fair value or impairment accounting. Here, any unrealised gains or losses arising under those models may be deferred. This provision inherently captures foreign exchange differences where they are embedded in the fair value or impairment measurement. For example, a financial asset measured at fair value in a foreign currency will necessarily incorporate currency translation into its fair value. Accordingly, there was no need for the legislator to make a separate reference to FX in this limb: the deferral operates automatically for all unrealised movements, whether driven by price fluctuations or by exchange rates.
2. Paragraph (b) covers assets and liabilities held on capital account. To remove interpretive doubt, Article 20(4)(d) explicitly clarifies that, for this category, “unrealised gain or loss includes an unrealised foreign exchange gain or loss”. The deliberate placement of this clarification within the capital account limb, and not in paragraph (a), evidences an intent to provide a separate relief for FX movements specifically in respect of capital positions. Crucially, this relief extends even to capital items accounted for at historical cost, thereby allowing deferral of FX differences on related liabilities such as already mentioned foreign-currency loans or long-term payables to contractors and suppliers.

This reading allows us to reach the following conclusions:

• Capital account items are not required to be subject to fair value or impairment accounting in order to qualify. Thus, FX differences may be deferred even if the asset is carried at cost, and FX movements on related liabilities may also be deferred under Article 20(3)(b).
• Fair value or impairment items may qualify for deferral under Article 20(3)(a) regardless of whether they are held on capital or revenue account, but only if they are subject to fair value or impairment measurement under the applicable accounting standards.
• Ordinary cash and bank balances are IAS 21 monetary items carried at nominal value and therefore fall outside both categories of relief. They must be recognised in taxable income as they arise.

This reading is reinforced by FTA in Accounting Standards Corporate Tax Guide CTGACS1. In Section 5.2.6 the FTA explains the effect of the realisation basis: “Taking into account gains and losses on a realisation basis means that unrealised gains and losses recorded in the Taxable Person’s Financial Statements would be disregarded for Corporate Tax purposes. This means:

• For assets and liabilities subject to fair value or impairment accounting, all unrealised gains would not be taxable, and all unrealised losses would not be deductible, until both (gains and losses) are realised.
• For assets and liabilities held on capital account, unrealised gains and losses, including unrealised foreign exchange gains and losses, would not be taxable or deductible, respectively, until they are realised. For assets and liabilities held on revenue account, unrealised gains and losses arising would continue to be taken into account in determining Taxable Income.

Accordingly, foreign exchange differences on cash and bank balances, which are revenue account items under IAS 21, cannot be shifted to the realisation basis. They must be recognised in taxable income as they arise.

Certain ambiguity arises from Section 4.3 of FTA Corporate Tax Guide No. CTGDTI1, which notes that “it is common for assets or liabilities held by a Business to change in value for accounting purposes, even where no transactions have taken place. For example, assets on the balance sheet may be revalued, or holdings of foreign currencies or loan liabilities denominated in a foreign currency may fluctuate with exchange rates. As the value of an asset or liability changes, gains or losses could arise even where there has been no actual disposal or transfer (i.e. “realisation”) of the asset or liability. Taxable Persons are required to include any realised and unrealised gains and losses reported in the Financial Statements in the determination of their Taxable Income. This is unless the election to use the realisation basis is made, in which case only the realised gains and losses are considered in the determination of Taxable Income”.

At first sight, this may suggest that FX differences on cash and bank balances should also be treated as unrealised. Yet the Guide does not state that these particular unrealised FX movements may be deferred under the realisation election. Read together with Sec. 5.2.6 of CTGACS1, the more consistent interpretation is that the relief remains confined to (i) items subject to fair value or impairment accounting and (ii) items held on capital account. Accordingly, Sec. 4.3 of CTGDTI1 should be understood as a descriptive observation of accounting practice rather than an expansion of the statutory election.

Legislative intent

The policy rationale underlying this design can be explained as follows:

• Preventing taxation of “paper gains” on non-operating positions. Unrealised FX differences on capital account items, such as long-term loans or investments, often cause large swings in reported profit without generating liquidity. Deferral avoids taxing purely notional gains and better aligns tax liability with cash flows.

• Preserving alignment of taxable income with operational performance. FX fluctuations on revenue account items, including cash and deposits, reflect the day-to-day results of business operations. The legislator appears to have intended that such differences remain recognised immediately, thereby ensuring that taxable income mirrors the economic performance of the business in real time.

• Avoiding redundancy in drafting. FX is mentioned only in connection with capital account items because it is not inherently embedded in cost-based measurement. By contrast, in the fair value and impairment models, FX is already subsumed in the underlying measurement, so a separate legislative reference would have been unnecessary.

The legislative framework thus suggests a balancing act. The deferral mechanism is crafted to avoid distortions arising from unrealised gains on capital positions, while ensuring that operating results, including routine FX movements on cash and bank balances, remain within the current-period tax base. The selective reference to foreign exchange differences only in the capital account limb strongly supports this interpretation.

Certainty

From a compliance perspective, it follows that applying the realisation method to cash and bank balances, absent explicit support from the FTA, would run counter to both the letter and the apparent purpose of Article 20.

Although one might speculate that the FTA could, through future public or private clarification, take a more expansive view, any such interpretation would require a clear policy departure. Until such clarification is issued, reliance on the realisation method for cash and bank balances appears legally tenuous and carries a material risk of challenge.

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 we have tried my best to avoid. If you find any inaccuracies or errors, please let us know so that we can make corrections.