Tax depreciation has just been made available for real estate entities using fair value accounting. Under Ministerial Decision No. 173 of 2025, the UAE Ministry of Finance has allowed taxable persons to claim annual depreciation deductions on investment properties measured at fair value, provided they report gains/losses on a realisation basis.
This decision, issued in July 2025, applies to tax periods starting on or after 1 January 2025 and brings a significant shift in tax treatment under the UAE Corporate Tax Law.
What Changed?
Fair value property holders can now claim tax depreciation
Previously, entities using the IAS 40 Fair Value Model were not allowed to deduct depreciation for tax purposes. The new rule changes that.
Eligible taxpayers can now deduct depreciation annually, provided their reporting is based on the realisation basis under Article 20(3) of the Corporate Tax Law.
How the Depreciation Deduction Works
- Annual Limit:
Deduction is limited to the lower of:
- 4% of the original cost of the property
- Tax Written Down Value (TWDV) at the start of the tax period
- 4% of the original cost of the property
- Pro-rated Deduction:
If the property was held only part of the year, the deduction must be prorated accordingly.
Key Condition: Make a One-Time Irrevocable Election
To access this depreciation relief, the taxpayer must:
- Elect in the first relevant corporate tax return, either:
- The first period the Decision applies (2025 onwards), or
- The period the property is first held
- The first period the Decision applies (2025 onwards), or
- Cover all qualifying investment properties in one go
If the election is not made, the taxpayer will not be eligible for the deduction, and missing the election window means permanently losing this benefit.
Beware the Claw-Back Rule
When a realisation event occurs (e.g., sale, derecognition, group transfer, or cessation of business), all previously claimed depreciation must be added back to taxable income, unless:
- The transfer is within a tax group, or
- It qualifies for restructuring relief
Anti-Abuse Provisions Apply
The UAE tax authority reserves the right to deny depreciation if:
- An intra-group transfer lacks commercial substance
- The transaction is done primarily for tax benefits
This ensures that only genuine business activities receive depreciation relief.
Why This Matters
Improved Cash Flow: Fair value real estate portfolios can now reduce taxable profits with depreciation.
Tax Neutrality: Brings fair value and cost model properties into alignment under the tax regime.
Strategic Planning Opportunity: The once-only election means businesses need to act fast and plan long-term.
Action Steps for Businesses Using Fair Value Accounting
Confirm Eligibility
- Are you reporting gains or losses only on realisation?
- Are your properties measured under the fair value model per IAS 40?
Identify All Qualifying Properties
- List every property held at fair value to include in the election.
Elect on Time
- File the irrevocable election with your first relevant tax return.
Plan for Clawbacks
- Model future scenarios where depreciation may need to be added back.
Prepare Documentation
- Keep records of original cost, opening values, and TWDV for every property.
Align Financial Reporting
- Adjust for deferred taxes, planning forecasts, and tax accounting disclosures.
Need Expert Guidance?
At KLOUDAC, our corporate tax specialists help you assess, elect, and optimise your investment property strategy so you stay compliant while maximising tax benefits.
📞 Call us at +971 50 43 53 515 or visit kloudac.com to get started.