IAS 12 - deferred tax, the realisation basis election and the timing differences that follow

What UAE entities need to get right when accounting for corporate tax under IFRS

Where UAE corporate tax sits within IAS 12

The UAE Corporate Tax Law (Federal Decree-Law No. 47 of 2022) applies to tax periods starting on or after 1 June 2023. For IAS 12 purposes, the market has generally taken the view that the law became substantively enacted on 16 January 2023, when the Cabinet decision No. 116 of 2022 was issued, fixing the AED 375,000 threshold was published above which the 9% rate applies. IAS 12 measures tax at rates enacted or substantively enacted by the end of the reporting period (IAS 12.46–47), so for a 31 December 2022 year-end this was a non-adjusting event after the reporting period (IAS 10.22(h)). Entities recognised deferred tax from the first reporting date on or after 16 January 2023, on temporary differences expected to reverse in periods when the tax applies. For a December year-end, the first tax period began on 1 January 2024f

The core IAS 12 mechanics are unchanged. Current tax is the amount payable on taxable profit for the period (IAS 12.5, 12.12). Deferred tax arises on temporary differences, being the difference between the carrying amount of an asset or liability and its tax base (IAS 12.5). Deferred tax liabilities are recognised for all taxable temporary differences (IAS 12.15) subject to limited exceptions, and deferred tax assets are recognised only to the extent it is probable that taxable profit will be available to use them.

What makes the UAE different is how the tax base is determined. The Corporate Tax Law uses accounting profit as the starting point for taxable income and then applies a defined set of adjustments. Where there are no adjustments, the tax base follows the carrying amount and no temporary difference arises. So, in the UAE, deferred tax is largely a function of the adjustments. For entities holding fair valued or impaired assets, the realisation basis election is usually the most significant of them

Which rate to use

IAS 12 requires deferred tax to be measured at the tax rates expected to apply when the asset is realised or the liability settled, based on rates enacted or substantively enacted at the reporting date (IAS 12.46–47). The UAE has a two-band structure, 0% up to AED 375,000 and 9% above. Where different rates apply to different levels of taxable income, IAS 12.49 requires deferred tax to be measured at the average rate expected to apply to the taxable profit of the periods in which the differences reverse. For entities whose taxable income comfortably exceeds the threshold, the average rate is very close to 9%, so many entities apply 9% as a practical simplification, which is acceptable where the difference is not material. Entities with profits near the threshold should use the average expected rate. Entities in Small Business Relief, Qualifying Free Zone Persons and members of in scope multinational groups need a more careful analysis, covered below.

Small Business Relief. A resident person whose revenue is AED 3 million or less can elect, tax period by tax period, to be treated as having no taxable income. Relief is available for tax periods ending on or before 31 December 2029 (Ministerial Decision No. 131 of 2026). It is not available to Qualifying Free Zone Persons or to members of multinational groups within the Pillar Two revenue threshold. For IAS 12, two points follow. First, deferred tax is measured at the rate expected to apply when the difference reverses (IAS 12.46-47). If the entity expects to elect the relief and meet the revenue test in the periods of reversal, the expected rate is nil and no deferred tax arises. Because the election is annual and the relief currently ends with periods ending on 31 December 2029, differences expected to reverse later, or when revenue is forecast to exceed AED 3 million, are measured at 9%. Second, tax losses and disallowed net interest arising in a period for which the relief is elected cannot be carried forward, so no deferred tax asset arises on them. The entity needs a documented forecast of whether it will stay within the relief.

Qualifying Free Zone Persons (QFZP). A QFZP pays 0% on Qualifying Income and 9% on other income. Deferred tax is therefore measured at the rate expected to apply on reversal, which means 0% where the difference is expected to reverse in Qualifying Income and 9% where it is expected to reverse in non-qualifying income. This needs a clear view of which income stream the asset or liability supports. It also needs a view on the risk of losing QFZP status, for example by breaching the de minimis limits on non-qualifying revenue, which removes the 0% treatment for the period and the following four periods. Where status is uncertain, the judgement and its basis should be disclosed.

From accounting profit to taxable income

Before looking at deferred tax, it helps to be clear on the adjustments that drive current tax. The table below lists the ones we most often see in UAE computations, together with whether they typically create a permanent or a temporary difference.

Table 1: Common UAE adjustments and their IAS 12 character

The realisation basis election explained

Under IFRS, many assets and liabilities are remeasured before they are sold investment property at fair value, equity investments at fair value through profit or loss, trade receivables through expected credit losses, and so on. If those movements were taxed as they are recognised, an entity could owe tax on a revaluation gain it has not received in cash. The Corporate Tax Law addresses this by allowing an entity that prepares financial statements on an accrual basis to elect to take gains and losses into account on a realisation basis instead (Article 20(3) of the UAE Corporate Tax Law).

The election comes in two forms, and the choice matters.

Table 2: The two realisation basis options

The ministerial rules on determining taxable income set out how the adjustments work. For non-financial assets, the entity excludes depreciation, amortisation and other value changes to the extent they relate to a movement in net book value above original cost. In other words, fair value gains above cost are ignored until realisation, while reductions below cost are generally still recognised as they arise. For financial assets and for liabilities in scope, all changes in value, including amortisation, are excluded until realisation. On realisation, which includes sale, settlement, transfer and complete worthlessness, the deferred amounts are brought back into taxable income.

Option A is wider than many entities initially appreciated. Because it covers everything subject to impairment accounting, it catches expected credit loss provisions on trade receivables. An entity that has elected Option A will therefore not get a tax deduction for its ECL charge until the receivable is written off or otherwise realised, which creates a deductible temporary difference. Option B is narrower, catching only capital account items, and it leaves ECL on trading receivables deductible as provided.

How the election creates timing differences

Without the election, the tax base of a fair valued asset moves in step with it carrying amount, because each gain or loss is taxed or deducted as it is recognised. With the election, the tax base stays anchored at original cost (adjusted for anything that has been recognised for tax), while the carrying amount moves with fair value. That gap is a temporary difference under IAS 12, and deferred tax follows.

Table 3: Effect of the election on common items

Two points are worth stressing. First, the election does not change the total tax paid over the life of an asset. It changes the timing. In practice the total can differ if rates change, if the 0% band, the 75% loss cap or the interest limitation apply differently across periods, or if the asset is realised in a different structure. Second, because the tax base under the election depends on the history of each individual asset, the deferred tax calculation has to be done asset by asset. A single aggregate adjustment on "revaluations" will rarely survive audit scrutiny.

Investment property and the 4% deemed depreciation

The realisation basis solved one problem for investment property owners and created another. An entity carrying investment property at cost under IAS 40 deducts depreciation every year (IAS 40.56). An entity carrying the same building at fair value, having elected the realisation basis, had no depreciation charge at all, so it paid more tax in the meantime than a cost model peer (IAS 40.33).

Ministerial Decision No. 173 of 2025, issued in June 2025, and applying to tax periods beginning on or after 1 January 2025, closes that gap. An entity that has elected the realisation basis under Article 20(3) of the Corporate Tax Law may make a further irrevocable election to claim, for each 12-month tax period, a deduction each year equal to the lower of 4% of the original cost of the property and its tax written down value at the beginning of the period. The election covers all investment properties held at fair value, not property by property. The deduction is pro-rated for part periods, and the depreciation claimed is added back on realisation, including on sale, a change of accounting policy to the cost model, or cessation of business. As an exception to Ministerial Direction 134 of 2023's requirement to elect in the first tax return, the Decision gives an entity that has not yet elected the realisation basis a window to do so in the same return in which it makes the depreciation election. If the timeline is missed, the right to claim depreciation is lost.

For IAS 12 purposes, every deemed depreciation deduction reduces the tax base of the property without any change in it’s carrying amount (IAS 12.5, 12.51). The taxable temporary difference therefore grows by the amount of the deduction each year, and so does the deferred tax liability. The cash benefit is real, but it is a timing benefit, and the financial statements must show it as such.

IAS 12 also contains a rebuttable presumption that investment property at fair value is recovered through sale. In the UAE, the headline rate is the same whether the asset is sold or used, and the recapture of deemed depreciation on realisation means the tax base is effectively the tax written down value in both cases (IAS 12.51C). In most situations the presumption therefore makes little difference to the measurement, but it should still be documented.

Practical example: Abu Dhabi Co

Abu Dhabi Co is a UAE resident property investment company with a 31 December year end. Its first tax period ran from 1 January to 31 December 2024. In its first tax return it elected the realisation basis under Option A, and it has elected the 4% deemed depreciation from 2025 onwards [Article 20(3)(a) of the UAE Corporate Tax Law]. The relevant facts are below.

Table 4: Key facts