When a company revalues its Property, Plant, and Equipment (PPE), the following rules apply:
- If an asset’s carrying amount is increased, the increase shall be recognised in other comprehensive income (OCI) and accumulated in equity under the heading of revaluation surplus.[1]
- However, the increase shall be recognised in profit or loss (P&L) to the extent that it reverses a revaluation decrease of the same asset previously recognised in P&L.[2]
- If an asset’s carrying amount is decreased because of a revaluation, the decrease shall be recognised in P&L.[3]
- However, the decrease shall be recognised in OCI to the extent of any credit balance existing in the revaluation surplus in respect of that asset. The decrease recognised in OCI reduces the amount accumulated in equity under the heading of revaluation surplus.[4]
Under IAS 16 “Property, Plant and Equipment”, a revaluation of PPE results in:
- An increase in asset value being credited to OCI (not P&L).
- A decrease in value flowing through P&L — unless it reverses a previous OCI gain.
Depreciation thereafter is based on the revalued amount, and companies may transfer the revaluation surplus to retained earnings as the asset is used or upon disposal.
The resulting revaluation surplus typically bypasses the profit and loss statement (P&L) and flows through Other Comprehensive Income (OCI).
Crucially, IAS 16:41 clarifies that these transfers are not made through P&L.
This accounting treatment raises a critical question under UAE Corporate Tax legislation: Should the surplus be included in taxable income?
Article 2 of the Ministerial Decision No. 134 of 29 May 2023 provides that ‘accounting income shall be adjusted to include any realised or unrealised gains and losses that are reported in the Financial Statements insofar as they would not be subsequently recognised in the statement of income’. This rule targets gains that remain permanently outside the income statement. At first glance, this would appear to include revaluation surpluses recorded in OCI.
However, the situation appears more complicated. Despite never being routed through P&L, the revaluation surplus can indirectly affect profit when:
- The asset is sold or impaired;
- Depreciation based on the revalued amount exceeds that based on book value.
Therefore, three competing interpretations emerge.
[1] IAS 16:39
[2] Ibid
[3] IAS 16:40
[4] Ibid
Option 1: Immediate Tax Recognition of the Surplus
This approach treats the revaluation surplus as taxable income in the year it arises, regardless of whether it is recycled to P&L. It aligns with a literal reading of the Ministerial Decision: if the gain is not reclassified to the income statement, it must adjust the accounting profit.
However, this interpretation disregards both the existing potential for the surplus to shield future revaluation losses from affecting accounting income recognised in P&L, and the economic timing of realization. As a result, it may create a mismatch between taxable income and actual cash flows, taxing entities on gains that have not yet materialized or provided economic benefit.
Option 2: Taxable Only When Transferred to Retained Earnings
Under IAS 16, once an amount is transferred from revaluation surplus to retained earnings, it no longer serves as a shield against future revaluation losses of the same asset. At this point, the amount becomes permanently detached from the asset’s valuation movements and cannot be reclassified to or offset within the income statement.
This moment, when the surplus loses its reversibility, aligns precisely with the condition described in Article 2(1)(a) of Ministerial Decision No. 134 of 2023, which requires adjustment to accounting income for ‘realised or unrealised gains and losses that are reported in the Financial Statements insofar as they would not be subsequently recognised in the statement of income’.
Hence, the transfer to retained earnings serves as the triggering event for tax purposes under UAE Corporate Tax Law.
Option 3: Conditional on Realised Gains Method Election
Under UAE Corporate Tax rules, the default basis is the unrealised accounting method — meaning gains and losses are considered as reported in the financial statements, regardless of whether they have been realised in cash terms. However, taxpayers can choose to adopt the realised basis by making an election.
If the realised basis is elected, the entire revaluation surplus should be included in taxable income immediately, as the gain (though reported in OCI) is not expected to be subsequently recognised in the income statement. This triggers an adjustment under Article 2(1)(a) of Ministerial Decision No. 134.
If the realised basis is not elected, then Option 2 applies: the revaluation surplus remains outside taxable income until it is transferred to retained earnings and thereby loses its ability to reverse future losses. This is the point at which the gain ceases to affect income and becomes subject to tax adjustment.
This approach allows the timing of tax recognition to align with the entity’s chosen method of accounting for unrealised gains and losses under UAE tax law.
Summary
Among the three interpretive options for the tax treatment of PPE revaluation surplus, Option 2 “Recognizing the surplus for tax purposes only when it is transferred to retained earnings” appears the most consistent with both Corporate Tax legislation and international accounting standards.
Again, Article 2(1)(a) of the Decision No. 134 requires an adjustment to accounting income for ‘realised or unrealised gains and losses that are reported in the Financial Statements insofar as they would not be subsequently recognised in the statement of income’. This legal test is not based on the timing of realisation, but on the prospect of recognition in the income statement. While Option 3 introduces a distinction based on the taxpayer's election of realised vs unrealised basis and ties tax recognition to that choice, this approach misplaces the focus. The issue is not whether the gain is realised, but whether it will ever be recognised in the statement of income. As long as the revaluation surplus remains in OCI, it can still be reversed by future revaluation losses, and therefore, does not yet meet the condition for tax adjustment under Article 2(1)(a).
By contrast, once the surplus is transferred to retained earnings, it becomes irreversible and detached from the asset’s valuation path. At that point, it will not be subsequently recognised in the income statement, and therefore must be adjusted for tax purposes.
Option 2 accurately reflects this logic. It provides a clear and objective trigger (the transfer to retained earnings) that aligns with both the accounting framework of IAS 16 and the statutory language of the Ministerial Decision. It avoids premature and inconsistent taxation of unrealised gains (as in Option 1) and avoids misapplying the election-based concept of realisation (as in Option 3).
For these reasons, Option 2 appears the correct and well-substantiated interpretation under UAE Corporate Tax Law unless further clarification is provided by the Federal Tax Authority or the Minister.
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.
