UAE Allows Tax Deduction on Investment Properties

The UAE Ministry of Finance has released Ministerial Decision No. 173 of 2025 (“MD 173”), a landmark regulation enabling businesses to claim tax depreciation deductions on investment properties held at fair value, effective for tax periods starting 1 January 2025. The measure represents a significant shift in the treatment of real estate assets for corporate tax purposes and aligns the UAE’s tax framework more closely with international standards.

 

A Strategic Update to Corporate Tax Law

MD 173 supplements Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (“Corporate Tax Law”) by allowing taxable persons who have elected the realisation basis under Article 20(3) to deduct depreciation on investment properties reported at fair value, as defined by International Accounting Standard (IAS) 40.

 

This move levels the playing field between entities using different accounting models - cost vs fair value - and provides enhanced clarity and compliance options for UAE-based property investors.

 

Who Qualifies?

To be eligible, taxpayers must:

 

• Prepare financial statements on an accrual basis; and

• Elect the realisation basis for recognising gains and losses on property transactions under Article 20(3).

 

Once made, this election is irrevocable and applies to all qualifying investment properties. Notably, land is excluded from the depreciation regime.

 

Depreciation Mechanics

The deductible amount for each 12-month tax period is the lower of:

 

• 4% of the Original Cost, or

• The Tax Written Down Value (TWDV).

 

The deduction begins in the tax period in which the election is made and continues until the TWDV reaches zero, the asset is disposed of, or is reclassified under a different accounting model.

 

Opening Value is calculated as the Original Cost less a deemed 4% depreciation per year for prior full calendar years of ownership before the election. If the property was acquired earlier, historical depreciation is deemed and applied retroactively to calculate the Opening Value for tax purposes.

 

Election Timelines and Compliance

The depreciation election must be submitted via the first applicable Tax Return, depending on the property’s acquisition date or transition from Small Business Relief under Article 21. Missing this deadline forfeits the right to claim the deduction.

 

Entities with off-calendar fiscal years (e.g., March 2024 – February 2025) must ensure accurate filing or amend previously submitted returns if they’ve already claimed such deductions pre-MD 173.

 

Realisation Events and Recapture Provisions

A “realisation” occurs upon:

 

• Sale or disposal of the property

• Derecognition or switch from fair value to cost model

• The business ceasing to be taxable

• Entry into Small Business Relief (Article 21)

 

On realisation, all previously claimed depreciation must be added back to taxable income unless the transfer qualifies for intra-group relief (Articles 26 or 27) or is within a Tax Group.

 

Group Transfers and Anti-Abuse Measures

Intra-group transfers must carefully track depreciation history. Any prior deductions by the transferor are excluded from the transferee’s deduction base to avoid duplicate tax relief. However, these amounts must be recaptured on subsequent disposal of the asset by the transferee.

 

A specific anti-abuse provision empowers the Federal Tax Authority (FTA) to deny depreciation deductions in cases of non-commercial or artificial arrangements between related parties - enhancing the scope of Article 50’s general anti-avoidance rule.

 

Implications for QIFs and REITs

The Decision also supports Qualifying Investment Funds (QIFs) and Real Estate Investment Trusts (REITs) exempt under Article 10. These entities are deemed to have elected the depreciation regime, and their investors are entitled to automatic deductions, subject to recapture upon disposal.

 

Strategic Considerations and Industry Response

The introduction of MD 173 has been widely viewed as a positive step for aligning tax treatment with global accounting practices, offering meaningful relief for businesses holding high-value investment properties.

 

“This is a time-sensitive but strategic opportunity. Companies must act promptly to evaluate their portfolios, ensure documentation integrity, and model long-term tax impacts,” said a senior tax advisor at KPMG Middle East.

Legal analysts also note that while this closes prior planning gaps, the timing and scope of elections must be managed precisely to avoid unintended recapture or loss of benefits.

 

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