Taxation of Unrealised Gains or Losses under UAE Corporate Tax

Taxation of Unrealised Gains or Losses under UAE Corporate Tax

Section 5 of the proposed UAE Corporate tax law,    deals  with the tax treatment of unrealised gains and losses,  which appear in the  financial statements . Before understanding the tax  provisions, we first need to understand , what  are unrealised gains and Loss.

Unrealised gain

An unrealised gain,  is an increase in the value of an asset or investment,  of the owner,   which has not been realized in cash  .  Generally,   an unrealised gain  would arise in the value of stock owned by a business,   gold, property  or other investment made by investors. A gain becomes a realised 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 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. On the other hand, if Amir sold shares of ABC LLC  at AED 350 per share, the gains are treated as realised gain.

Unrealised Loss

An unrealised  loss,  is a decrease in the value of an asset or investment,  of the owner,   which has not been  suffered in cash  .  Generally,   an unrealised  loss would arise in the value of stock owned by a business,   gold, property  or other investment made by investors. A loss becomes a realised 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 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 unrealised Loss. If ABC LLC sold office space for AED 35, 000, it  would be treated as a realised 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 statement . The question that arises is, what should be the tax treatment of such unrealized gains or losses.

Treatment of unrealised gains and losses 

The proposed UAE corporate tax  law contains specific rules to determine , how the  unrealised gains or losses, Accounted for in the financial statements, should be considered when calculating taxable income. It also differentiates whether the unrealised gains or losses  are on Capital account or on 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 unrealised gains and losses

If unrealised 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, long term liabilities such as loans to buy property etc .

Revenue unrealised gains and losses

If unrealised 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 atraded by the company  , repairs of machinery and equipment, wages of employed and workers, salaries for staff etc.

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