Ministry of Finance introduces tax depreciation rules for investment properties measured at fair value

Background

On 17 July 2025, the UAE Ministry of Finance has issued Ministerial Decision No. (173) of 2025 (MD 173), which introduces new rules on depreciation adjustments for investment properties held at fair value for the purposes of the Corporate Income Tax (CIT) law¹. According to this decision, taxable persons who elect to take into account gains and losses on a realization basis may claim a tax depreciation deduction for investment properties held at fair value.

The amount of tax depreciation that can be deducted is limited to the lower of the tax written down value of the investment property or 4% of its original cost. This deduction applies for each 12-month tax period, or is prorated for any part of a tax period during which the property is held. The deduction is available to taxpayers who hold investment properties either before or after the introduction of corporate tax.

MD 173 was specifically introduced to address a gap in the CIT framework where taxpayers holding investment properties measured at fair value and electing the realization basis were previously unable to claim depreciation deductions for tax purposes.

 

Accounting treatment of investment properties

Given that a taxpayer's accounting income, determined in accordance with the applicable accounting standards form the basis for computing taxable income for corporate tax purposes, it is essential to first understand how investment properties are treated under the applicable accounting standards in the UAE.

Unlike other types of property, which are typically recorded under International Accounting Standard (IAS) 16 – “Property, Plant and Equipment”, investment properties fall under IAS 40 – “Investment Property”. As per IAS 40, an entity may choose to measure investment properties using either the fair value model or the cost model and must apply the selected policy consistently to all of its investment properties.

The below table highlights the major differences, relevant for corporate tax purposes, between the cost model and the fair value model for measuring investment property under IAS 40:

The cost model measures the property at its original cost, adjusted for accumulated depreciation and impairment losses, which gradually reduce the property's book value over time. In contrast, the fair value model requires the property to be remeasured at its market value at each reporting date. Any changes in value are recognized in profit or loss, and no depreciation is applied.

Accordingly, the book value under the cost model reflects the historical cost net of depreciation, while under the fair value model, it reflects the property's current market value, which may vary from year to year.

 

Interaction between fair value accounting model and realization basis for tax purposes

As per the CIT law², taxpayers preparing their financial statements on an accrual basis have the option to elect the ‘non-realization basis’ or realization basis for determining taxable income.

Under ‘non-realization basis’, all gains and losses, including unrealized fair value movements, are included in the taxable income in the period in which they are recognized in the financial statements. This approach aligns with the fair value model of IAS 40 and may result in a tax payable on gains that have not yet been realized in cash.

Realization basis allows the taxpayer to exclude unrealized gains and losses from taxable income. Only gains or losses that are realized through sale or disposal of the investment property are included in the tax payable computation. This approach is particularly beneficial for businesses with significant exposure to fair value fluctuations, as it provides greater alignment between tax liabilities and actual cash flows.

However, electing for realization basis can lead to a misalignment between tax and accounting treatments when the fair value model is applied. As mentioned, under this model, investment properties are revalued annually, resulting in unrealized gains or losses in the financial statements, while no depreciation is allowed. Nevertheless, such gains or losses are not taxable until they are realised through a sale or disposal, due to the application of the realization basis for tax purposes.

To address this mismatch and better reflect the economic condition of the investment property, the Ministry of Finance now allows a notional depreciation deduction. This is in general calculated at a fixed rate of 4% per annum based on the original cost of the investment property.

In contrast to the above, the cost model permits the annual depreciation of the asset’s original cost in accordance with the applicable accounting standards, and more accurately reflects the wear and tear and the economic condition of the investment property over time. Under this model, depreciation is a tax-deductible expense, regardless of whether the taxpayer applies the realization basis.

 

Key features of the Ministerial Decision

Investment property is defined as a building or part of a building held by the owner or by the lessee to earn rental income or for capital appreciation or both. This includes properties under construction or development for future use as investment property, vacant buildings to be leased, and buildings leased out under operating leases.

However, land is excluded and must be separated from the overall value of the property, as depreciation is only applicable to the portion attributable to the building. In addition, the definition excludes properties held for sale in the ordinary course of business or in the process of construction or development for such sale, owner-occupied properties, properties occupied by employees or properties leased under finance leases. Lastly, properties used in the production or supply of goods and services or for administrative purposes are not considered as investment properties³.

The Ministerial Decision allows a depreciation deduction for tax purposes, even though no depreciation is recorded in the accounting books under the fair value model. The allowable deduction is the lower of 4% of the original cost of the property per year or the tax written down value (carrying value) at the beginning of the relevant tax period.

Election to apply depreciation to investment property held at fair value is available to taxpayers that (i) prepare financial statements on accrual basis of accounting, and (ii) have elected to take into account gains and losses on a realization basis.

The Ministerial Decision applies to tax periods beginning on or after 1 January 2025. This means that taxpayers who already held investment property in 2024 and had elected the realization basis cannot apply a depreciation deduction for that year. Taxpayers applying small business relief should make the election once they become subject to regular taxation (in 2027 or earlier).

The election must be made in the tax return for the first tax period in which the investment property is held. As the option to make this election is not yet available in the current tax return forms, it is anticipated that it will be introduced starting with tax returns for the tax period 2025 onwards.

Once made, the election applies to all investment properties held at fair value and is irrevocable. If the election is not made in time, the right to claim the depreciation deduction is forfeited.

When an investment property is realized, such as through sale, disposal or transfer, the aggregate amount of depreciation previously deducted must be added back to the taxable income. This means that the depreciation deduction for tax purposes is not permanent but is available until the property is disposed of or otherwise realized. Specific rules apply to taxpayers seeking to transfer investment properties under qualifying group relief or applying business restructuring relief.

 

Conclusion

The Ministerial Decision provides welcome clarity on the tax treatment of investment properties held at fair value under the realization basis. By allowing a depreciation deduction for corporate tax purposes, it better aligns tax outcomes with the accounting treatment and economic use of investment properties.

However, the benefit is only available if the election is made in the first relevant tax period. Therefore, taxpayers should carefully assess their eligibility and timing to avoid losing the right to apply depreciation deduction.

In the meantime, applicable depreciation rate for properties other than investment properties, and for investment properties measured under the cost model remain subject to the applicable rules under IFRS⁴, in absence of specific depreciation rules for tax purposes.

 

Key takeaway

The main objective of the Ministerial Decision is to reconcile the differences between accounting and tax treatments when the fair value model for investment properties is applied, and the realization basis is elected.

Taxpayers holding investment property at fair value can now claim a notional depreciation deduction of up to 4%, even though no depreciation is recorded in the financial statements. This ensures that taxpayers using the fair value model and realization basis are not disadvantaged compared to those using the cost model.

 

Reference

• Ministerial Decision No. (173) of 2025 on Depreciation Adjustments for Investment Properties held at Fair Value for the purposes of Corporate Tax Law

 

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¹Federal Decree Law No. (47) on the Taxation of Corporations and Businesses.
²Article 20(3) of Federal Decree Law No. (47) on the Taxation of Corporations and Businesses.
³IAS 40
⁴IFRS does not prescribe specific depreciation rates and instead requires case-by-case assessment based on useful life.