Taxation of Unrealised Gains or Losses under UAE Corporate Tax

May 17, 2022
|6 mins read

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.
More about “Taxation of Unrealised Gains or Losses” – Subscribe UAE Corporate Tax Course
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.
More about “Taxation of Unrealised Gains or Losses” – Subscribe UAE Corporate Tax Course