Ministerial Decision No. 173 of 2025

In Detail

Scope and Definitions

• MD 173 applies to “Investment Property” as defined in IAS 40 that is measured at fair value in the financial statements. Land is excluded from the definition of Investment Property.
• The Decision only benefits Taxable Persons that:
  • prepare financial statements on an accrual basis; and​
  • have elected the realisation basis for gains/losses under Article 20(3) of the Law.

Key features and mechanics

• Taxable Persons preparing financial statements on an accrual basis and applying the realisation basis for gains/losses may elect to deduct the lower of:
  • 4% of Original Cost, or
  • Tax Written Down Value (“TWDV”) for each twelve-month Tax Period.
• The election must cover all Investment Properties measured at fair value.
• The election cannot be revoked once made.
• The election must be made in the Tax Return for:
  • the first Tax Period to which MD 173 applies if Investment Property is already held;
  • the Tax Period in which Investment Property is first held thereafter; or
  • the first Tax Period in which Article 21 (Small Business Relief) ceases to apply.
• Failure to elect within the prescribed timeline results in forfeiture of the right to apply the regime.

Mechanics of the Depreciation Deduction

• Annual deduction = 4% of Original Cost or TWDV, whichever is lower.
• Pro-rated for part-year ownership or short/long Tax Periods.
• Deduction starts from the Tax Period stated in the election and continues until TWDV reaches nil, realisation occurs, or the property is removed from the fair value model.

Determination of Original Cost, Opening Value, and TWDV

• “Original Cost” is aligned with IAS 40 and includes capitalised subsequent expenditure, subject to arm’s-length requirements.
• “Opening Value” is determined by reducing Original Cost by a deemed 4% annual depreciation for each calendar year during which the property was held before the first relevant Tax Period.
• Opening Value is adjusted for a deemed 4% depreciation for each full calendar year prior to the first eligible Tax Period.
• TWDV equals Opening Value less depreciation actually deducted post-election.

Interaction with Intra-group Transfers reliefs and Recapture provisions

• Where Investment Property is transferred under Articles 26 or 27 of the Corporate Tax Law, or within a Tax Group, pre-transfer depreciation claimed by the transferor must be tracked and excluded from the transferee’s future deductions to avoid double benefit.
• Upon subsequent realisation, previously excluded amounts are reinstated into the Taxable Income of the initial Transferee (who subsequently disposes the assets).

Recapture on Realisation events​

• Realisation occurs on:
  • sale, disposal, derecognition or complete worthlessness;
  • switch from fair value to cost model;
  • entity becoming exempt or electing Article 21; or
  • business cessation (dissolution, liquidation, etc.).
• On realisation events, cumulative depreciation previously deducted is added back to Taxable Income unless the transfer occurs under an intra-group relief or within a Tax Group.
• Recapture is effected by adding back the aggregate depreciation previously claimed (pro-rated for partial disposals). If the transferor ceases to be a Taxable Person, recapture is attributed to the transferee.

Illustration

UAE Co owns a hotel building which is recorded as an Investment Property at Fair Value. The property was acquired on 1 January 2020 for AED 1,000,000. The property is held for five full calendar years prior to the first Tax Period relevant to MD173 (i.e. 2025), resulting in a deemed depreciation of 200,000 as on 1 January 2025 (5 years × 4% x AED 1,000,000). The opening value for tax purposes as at 1 January 2025 is AED 800,000. The property is disposed of on 1 April 2026 for AED 2,000,000. The table below illustrates the tax treatment under the depreciation election regime of MD 173:

Specific Anti Abuse rule

• The FTA may disallow depreciation where transfers between Related Parties are not driven by valid commercial reasons reflecting economic reality.
• The FTA may deny deductions where transfers between Related Parties lack commercial substance. This complements the General Anti-Abuse Rule in Article 50 of the Corporate Tax Law.

Impact on investment in QIFs

MD 173 operationalises the depreciation adjustment mechanism referenced in Cabinet Decision No. 34 of 2025 on Qualifying Investment Funds (QIF) and Qualifying Limited Partnerships. A QIF or a Real Estate Investment Trust (REIT) that is exempt under Article 10 of the CT Law is deemed to have elected to apply a depreciation deduction for investment properties held at fair value. Consequently, the investors in such QIFs and REITs is expected to be entitled to an automatic depreciation deduction for investment properties held at fair value. These investors would be required to add back all previously claimed depreciation to their Taxable Income upon disposal of the property or ownership interest.

Key takeaways

• The introduction of tax depreciation deductions for Investment Properties is a positive development for businesses in the UAE that follow the Fair Value Method for recognizing these properties. The Decision is also expected to have a positive impact for the investors in exempt QIFs and REITs that own such investment properties. The ability to claim depreciation on these assets when computing taxable income provides immediate tax relief, effectively reducing the cash outflow for taxes during the period the asset is held.
• Since these tax rules for depreciation differ from accounting rules, a temporary difference arises that may require recognition of a deferred tax in the financial statements.​
• It is advisable for businesses to undertake a comprehensive review of their fixed asset registers, valuation and depreciation policies, and tax reporting processes in light of these changes. Since this Decision is applicable only for new Tax Periods starting on or after 1 January 2025, it is not expected to have an impact on the current CT compliance cycle in relation to FY24. However, the upcoming tax impact for FY25, as well as impact on interim and final financial statements for FY25, could need to be determined from now on.
• For further assistance, you can reach us at CT.UAE@pwc.com or your dedicated PwC tax contact.