REITs under the lens: key interpretations from Public Clarification No. CTP005

Unrealised gains are not subject to tax

The FTA clarified that ‘Any unrealised income or expense such as fair value adjustments or impairments shall be excluded in determining Immovable Property Income until such time it is realised and recorded in the financial statements’. While the Clarification does not explicitly cite the legal basis for this position, it appears to stem from the definition of “Immovable Property Income” as set out in Article 1 of Cabinet Decision No. 34 of 2023. According to this provision, Immovable Property Income refers specifically to the ‘net realised profit …, as recorded in the financial statements’. This suggests a strictly realisation-based approach to determining taxable real estate income, thereby excluding valuation-driven adjustments from the tax base.

Example

A REIT holds an investment property acquired for AED 10 million. At the end of the year, based on a third-party valuation, the fair value of the property increases to AED 12 million. The REIT records a fair value gain of AED 2 mil­lion in its financial statements under IFRS-compliant accounting.

However, this gain is unrealised — no sale or rental income has been re­ceived, and the value increase exists only on paper.

For the purposes of determining Immovable Property Income under the UAE Corporate Tax regime, this AED 2 million fair value gain is excluded from the REI calculation. It does not form part of taxable income until the gain is real­ised, for example, when the property is sold or otherwise disposed of, and the gain is reflected in actual profit and loss.

Prohibition to offset losses against income?

The FTA introduces important interpretive guidance on how Immovable Prop­erty Income (IPI) should be calculated for the purposes of applying the Cor­porate Tax rules to investors in REITs. According to the Clarification: ‘In determining the Immovable Property Income, the realised income or gains from UAE Immovable Property shall be reduced by expenses directly linked to earning such income and a proportional part of the general expenses of the REIT, as per the accounting standards adopted by the REIT in preparing its financial statements. Immovable Property Income only encapsulates net realised profit and does not encapsulate a net realised loss posi­tion’.

At first glance, the language of last sentence suggests that while expenses may reduce taxable profits, losses from one property cannot be used to offset profits from another when calculating IPI for the purposes of as­sessing the 80% threshold relevant to taxation in the hands of investors.

Example

Consider a REIT holding two properties:

• Property A generates a net realised profit of AED 1,000,000 after de­ducting direct and allocated expenses.

• Property B incurs a net realised loss of AED 600,000 in the same pe­riod, also after expenses.

Under the usual accounting approach, the REIT would report a net income of AED 400,000 for the period.

However, under the FTA’s interpretation – If our understanding is correct – of Immovable Property Income, the AED 600,000 loss from Property B is not allowed to offset the AED 1,000,000 profit from Property A for purposes of determining the IPI figure relevant to investor taxation.

Therefore, for purposes such as evaluating whether 80% of IPI has been dis­tributed, the REIT is considered to have Immovable Property Income of AED 1,000,000, not AED 400,000. This reinforces that only profitable positions contribute to the IPI base, while losses are disregarded entirely, effectively ring-fencing the tax base against erosion from underperforming assets.

An extension of real estate exception for individuals conducting Business?

One of the more notable insights in the Clarification concerns the treatment of natural persons investing in REITs, particularly where such investments are made in the course of a business. The FTA explicitly states: ‘The adjustments to Taxable Income discussed below apply only to investors that are juridical persons that are Taxable Persons. If an investor is a natural person, they are not required to adjust their Taxable Income to include Immovable Property Income of the REIT. This is relevant even if the natural person holds the investments in a REIT as part of a Business or Business Ac­tivity.”

This passage lends itself to two distinct interpretations, each with materially different consequences for individual investors conducting business through licensed or unlicensed platforms:

• Additional carve-out interpretation. Under the first and more favorable reading, the FTA appears to create an additional carve-out for natural persons, exempting them from the requirement to include any Immov­able Property Income (IPI) of a REIT in their taxable income even where the REIT units are held in the course of a business activ­ity. In this case, the intention seems to be to preserve the neutral tax treatment of REIT investments made by individuals, regardless of whether they fall within the scope of a Business or Business Activity under the Corporate Tax Law. This interpretation aligns with the policy of simplifying compliance for individual investors and maintaining the attractiveness of REITs as accessible investment vehicles.
• An alternative, and more conservative, interpretation is that the FTA’s statement merely clarifies that the specific adjustment framework (such as the 80% income inclusion rule, or timing adjustments) is inapplicable to natural persons because the broader REIT exemption regime was de­signed exclusively for juridical persons. Under this reading, natural per­sons who hold REIT investments as part of a licensed business activity are not entitled to the adjustments available to corporate investors, and must instead include 100% of the income derived from REIT distribu­tions or gains without regard to thresholds, timing, or scope limitations discussed in the context of juridical persons. This would result in a less favorable outcome for individuals conducting regulated investment ac­tivity, such as licensed sole proprietors or natural persons managing real estate portfolios under a commercial license.

Which interpretation ultimately prevails remains to be seen and may require further administrative guidance. In the meantime, natural persons engaging in REIT-related investment activities under a license should carefully assess whether their tax treatment aligns with either of these positions and consider seeking clarification where significant tax exposure exists. The divergent out­comes highlight the importance of closely distinguishing between investor cat­egories and the structural intent behind the REIT regime, particularly as the Corporate Tax system matures and sector-specific norms become codified.

This is significant for individuals such as professional real estate investors, family offices, or sole proprietors who may hold REIT units as part of a broader business portfolio. Even if such individuals are otherwise subject to Corporate Tax (e.g. by surpassing the AED 1 million revenue threshold), the Clarification 3

may suggest that they are not required to impute or adjust for the REIT’s underlying Immovable Property Income in their own taxable income.

Exemption for disposal of units accompanied with undistributed profit explained

Article 4(4) of the Cabinet Decision No. 34/2025 states that ‘if the Real Estate Investment Trust distributes 80% … or more of its Immovable Property In-come to the investors in relation to the relevant Financial Year within 9 months from the end of that Financial Year, the income of the investor, who did not receive this distribution due to the disposal of its Ownership Interest in the Real Estate Investment Trust, shall not be adjusted proportionate to that disposal’.

The Clarification explains this logic. It is rooted in the practical approach to align taxation with entitlement to economic benefit. Since the seller of the units no longer holds the ownership interest at the time of distribution, they are considered not to have derived the income in a legally or economically meaningful way. However, this exemption from tax on the part of the seller is effectively compensated by an obligation on the part of the buyer of the REIT units to recognise and report the income, even if it accrued before their ac-quisition.

This principle is exemplified in Example 2c of the Clarification. In that case, Investor A sells its 10% ownership interest in a REIT to Investor Z on 31 March 2026, before the REIT makes any distribution relating to its 2025 Immovable Property Income. As Investor A does not hold the units at the time of distri¬bution, it is not required to include any portion of the 2025 IPI in its Taxable Income for the year ending 31 December 2026. Instead, Investor Z, the new holder of the units, must prorate 80% of the 2025 IPI and include their 10% share of that amount in their Taxable Income for the 2026 Tax Period, because they are the legal owner at the time of distribution.

This rule achieves symmetry in tax outcomes: while the original investor is relieved of tax liability upon disposal, the purchasing investor steps into the tax position, assuming the income inclusion as part of their ownership. It also reinforces the idea that for REITs, tax follows the right to receive the distribu-tion, rather than the period in which the income accrued at the fund level.

Deferral for income recognition for Distributing Funds

Where a REIT distributes at least 80% of its income within 9 months following the end of the relevant Tax Period in which the income was earned, the Im­movable Property Income shall be included in the investor’s taxable income in the Tax Period during which the distribution occurs. This mechanism operates as a form of deferral relief, aligning the investor’s tax liability with the actual receipt of income. The policy rationale appears to be the avoidance of cash- flow mismatches and taxation of income not yet received by the investor, pro­vided that the fund maintains a consistent policy of income distribution.

In contrast, where the fund fails to meet the 80% distribution threshold within the prescribed nine-month period, the investor is required to include the Im­movable Property Income in their taxable income in the Tax Period in which the income accrued to the fund, regardless of whether any distribution has actually occurred. This approach reflects a form of anti-deferral rule, ensuring that investors cannot indefinitely defer taxation by retaining income within the fund structure. It promotes tax neutrality between direct and indirect holdings of real estate assets.

So, this timing rule introduces a clear binary treatment based on distribution behavior:

Public Clarification No. CTP005 offers comprehensive interpretive guidance from the FTA on how the UAE Corporate Tax regime applies to investments in REITs and other Qualifying Investment Funds. While the Clarification does not introduce new legal provisions, it significantly refines the application of exist­ing rules.

What emerges from the Clarification is a clear message: the FTA seeks to implement a principled and economically coherent tax treatment of REIT-re­lated income, consistent with the Cabinet’s policy objective of incentivizing investment fund structures. Whether through deferral mechanisms tied to dis­tribution timing, or through the allocation of tax liability between sellers and purchasers of REIT units, the framework aims to preserve symmetry between economic benefit and tax exposure.

At the same time, the Clarification raises several interpretative questions - most notably regarding:

• the treatment of natural persons conducting licensed investment activ­ity,
• the extent to which corporate tax neutrality is preserved for individualinvestors, and
• the precise implications of the statement that Immovable Property In­come “does not encapsulate a net realised loss position”.

For now, the insights provided in CTP005 serve as a valuable reference point for navigating the practical application of Corporate Tax to REIT structures. They also reaffirm the FTA’s intent to align domestic tax policy with interna­tional best practices, while ensuring the regime remains adaptive to the UAE’s evolving investment environment.

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.