Taxation of Unrealised Gains or Losses under UAE Corporate Tax
Article 20(3) deals with the taxation of unrealized gains and losses, which appear in the financial statements. Before understanding the tax provisions, we first need to understand, what are unrealized gains and Loss.
Unrealized Gain
An unrealized gain is an increase in the value of an asset or investment, of the owner, which has not been realized in cash. Generally, an unrealized gain would arise in the value of stock owned by a business, gold, property, or other investment made by investors. A gain becomes a realized gain, when the item is sold for a profit in cash.
Example: Amir bought 100 stocks in ABC LLC for AED 300 per share in July 2024. Such a share of ABC LLC was quoted in September at AED350 per share. Here Amir gained AED 5000 ((350-300)*100) without selling the shares and hence such gain is known as an unreleased gain. However, if Amir sold shares of ABC LLC at AED 350/share, the gains are treated as realized gains.
Unrealized Loss
An unrealized loss is a decrease in the value of an asset or investment, of the owner, which has not been suffered in cash. Generally, an unrealized loss would arise in the value of stock owned by a business, gold, property, or other investment made by investors. A loss becomes a realized loss, when the item is sold for a loss in cash.
Example: ABC LLC purchased office space for AED 50,000 in July 2024. The value of the office space of ABC LLC decreased to AED 35,000 in September. Here ABC LLC incurred a loss of AED 15,000 without selling office space. This is known as unrealized Loss. If ABC LLC sold office space for AED 35, 000, it would be treated as a realized Loss.
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Recording of unrealized gains or losses in the financial statement
Under the Generally Accepted Accounting Principles, certain unrealized gains or unrealized losses may be recorded in the financial statements. The question that arises is, what should be the tax treatment of such unrealized gains or losses?
Treatment of unrealized gains or losses
The UAE CT law contains specific rules to determine, how the unrealized gains or losses, accounted for in the financial statements, should be considered when calculating taxable income. It also differentiates whether the unrealized gains or losses are on the Capital account or on the revenue account. Such classification is important because the tax treatment of capital unrealized gains or losses is different from revenue unrealized gains or losses.
Capital unrealized gains or losses
If unrealized profit or Loss arises from a Capital item, then such gains or losses are not considered when calculating taxable income. For this purpose, Capital items are items that have a long-term impact on a business. They include assets, such as machinery, and long-term liabilities such as loans to buy property, etc.
Revenue unrealized gains and losses
If unrealized profit or Loss arises from a revenue item, then such gains or losses are considered as income, when calculating taxable income. For this purpose, revenue items are items that have a short-term impact on a business. It includes assets other than capital and can include items such as the goods traded by the company, repairs of machinery and equipment, wages of employed and workers, salaries for staff, etc.
FAQs
- What is an unrealized gain under UAE law?
A: An unrealized gain is a potential profit that has not yet been realized or received in the form of cash or other assets. In the context of UAE Corporate Tax Law, it refers to the increase in the value of an asset that has not yet been sold or disposed of.
- Are unrealized gains taxable under UAE Corporate Tax Law?
A: No, unrealized gains are not taxable under UAE Corporate Tax Law. Only realized gains, i.e., gains that are realized upon the sale or disposal of an asset, are subject to taxation.
- Can I claim a tax deduction for unrealized losses?
A: No, you cannot claim a tax deduction for unrealized losses under UAE tax law. Only realized losses can be claimed as tax deductions.
