Corporate Tax UAE, Insights

UAE Corporate Tax: The Pre-CT Election 90% of Businesses Miss

UAE foreign tax credit corporate tax guide 2026

14 min read

What Are the UAE Corporate Tax Transitional Rules and Why Do They Matter in 2026?

Quick Answer: The transitional rules under Article 61 of Federal Decree-Law No. 47 of 2022 and Ministerial Decision No. 120 of 2023 allow UAE businesses to elect fair market value as the opening cost base for certain assets held before corporate tax started. Without this election, gains that accumulated in the pre-CT era become taxable at 9% when the asset is sold, even though no corporate tax existed when those gains arose.

Every UAE business filing its first corporate tax return by September 30, 2026 faces a decision that could save or cost them hundreds of thousands of dirhams. Yet according to Qaspro Global’s experience advising businesses through their first filings, roughly 9 out of 10 companies either do not know the transitional election exists or fail to apply it correctly.

The issue is simple: the UAE had no corporate tax before June 1, 2023. Many businesses hold property, investments, and intangible assets that gained value during those tax-free years. Without the transitional election, the FTA treats the original purchase price as the cost base, meaning every dirham of pre-CT appreciation becomes taxable at 9% on disposal. The transitional rules fix this, but only if you elect them properly.

How Does Article 61 Set Your Opening Balance Sheet for Corporate Tax?

Article 61(1) of Federal Decree-Law No. 47 of 2022 requires that the opening balance sheet for corporate tax purposes equals the closing balance sheet prepared under applicable accounting standards for the financial year ending immediately before the first tax period. For calendar-year businesses, that means the closing balance as of December 31, 2023 becomes the opening balance for the first tax period starting January 1, 2024.

For businesses with a June financial year, the closing balance as of May 31, 2023 sets the opening position for the first tax period beginning June 1, 2023.

Article 61(2) adds a critical safeguard: the opening balance must reflect arm’s length values for transactions between related parties and connected persons. If a company transferred assets to a related party below market value before corporate tax started, the FTA can adjust the opening balance to market value. This prevents companies from using pre-CT restructuring to shift taxable income between entities.

What Does Ministerial Decision No. 120 of 2023 Allow You to Elect?

Ministerial Decision No. 120 of 2023 implements the transitional relief under Article 61 by giving businesses the option to adjust the cost base of specific assets held before the first tax period. The election allows a Taxable Person to use the fair market value at the start of the first tax period as the deemed cost, instead of the original historic cost.

This election applies to three categories of assets:

Immovable property – land, buildings, warehouses, commercial units, and investment property held before the first tax period
Intangible assets – trademarks, patents, licenses, goodwill, customer lists, and software developed or acquired before corporate tax
Financial assets and financial liabilities – shares, bonds, investment portfolios, loans receivable, and similar instruments recorded on a historical cost basis before the first tax period

The election is irrevocable. Once you choose fair value for a category, you cannot switch back to historic cost. And it must be applied consistently within each asset class.

How Much Tax Can the Transitional Election Save? (AED Worked Example)

Consider a Dubai mainland company that purchased commercial office space in 2018 for AED 5,000,000. By January 1, 2024 (the start of its first tax period), the property’s fair market value had risen to AED 8,000,000. The company sells the property in 2025 for AED 10,000,000.

Scenario	Cost Base	Sale Price	Taxable Gain	CT at 9%
Without election (historic cost)	AED 5,000,000	AED 10,000,000	AED 5,000,000	AED 450,000
With election (fair value)	AED 8,000,000	AED 10,000,000	AED 2,000,000	AED 180,000
Tax saving				AED 270,000

The AED 3,000,000 gain that accumulated between 2018 and January 1, 2024 is excluded from taxation because no corporate tax existed during that period. The company only pays 9% on the AED 2,000,000 gain that arose after corporate tax began.

Qaspro Global advises every business holding pre-CT assets to run this calculation before filing. For companies with multiple properties or large investment portfolios, the savings multiply quickly.

Which Assets Qualify for the Transitional Election?

Not every asset qualifies. Ministerial Decision No. 120 of 2023 limits the election to assets that meet two conditions: they were held before the start of the first tax period, and they were recorded on a historical cost basis in the financial statements.

Asset Type	Qualifies?	Examples
Commercial property	Yes	Office, warehouse, retail unit, land
Residential investment property	Yes	Apartments, villas held for rental income
Intangible assets	Yes	Trademarks, patents, goodwill, franchise rights
Shares in subsidiaries (at cost)	Yes	Equity investments recorded at historic cost
Bonds and fixed-income securities	Yes	Corporate bonds, government bonds at amortised cost
Inventory	No	Stock, raw materials, work in progress
Cash and bank balances	No	Current accounts, fixed deposits
Trade receivables	No	Customer balances, invoiced amounts
Assets already at fair value	No	Investments carried at FVTPL under IFRS 9

Assets already recorded at fair value through profit or loss (FVTPL) under IFRS 9 do not qualify because their carrying amount already reflects market value. The election only benefits assets where there is a gap between historic cost and fair value.

How Do You Determine Fair Market Value for the Election?

The fair market value must reflect what the asset would sell for in an arm’s length transaction at the start of the first tax period. Acceptable valuation methods depend on the asset type:

Immovable property: Independent valuation report from a RERA-licensed or government-approved valuer. The valuation date should match the start of the first tax period (e.g., January 1, 2024 for calendar-year entities).
Intangible assets: Valuation by a qualified professional using income approach (discounted cash flow), market approach (comparable transactions), or cost approach (replacement cost).
Financial assets: Quoted market price on the valuation date for listed securities. For unlisted shares, a business valuation using net asset value, earnings multiple, or DCF method.

Qaspro Global, a UAE-based tax and accounting consultancy, recommends obtaining the valuation report before filing the CT return. The FTA can challenge a transitional election if the fair value used is not supported by independent evidence.

What Happens If You Sell an Asset at a Loss After Electing Fair Value?

The fair value election works both ways. If a business elects fair value as the cost base and later sells the asset below that fair value, the loss is deductible against other taxable income under Article 37 of FDL 47/2022. However, the deductible loss is calculated from the elected fair value, not the original historic cost.

Example: A company bought shares in 2019 for AED 1,000,000. Fair value at January 1, 2024 was AED 3,000,000. The company elects fair value. It later sells the shares for AED 2,500,000 in 2025.

With election: Loss = AED 3,000,000 – AED 2,500,000 = AED 500,000 deductible loss
Without election: Gain = AED 2,500,000 – AED 1,000,000 = AED 1,500,000 taxable gain

In this case, the election creates a tax loss instead of a taxable gain. The AED 500,000 loss can offset other income, saving AED 45,000 in tax, while the alternative would cost AED 135,000 in additional tax.

Can Free Zone Companies Use the Transitional Election?

Yes. Free zone companies that qualify as a Qualifying Free Zone Person (QFZP) under Article 18 of FDL 47/2022 can still make the transitional election under MD 120/2023. This matters because QFZP status is not permanent. If a free zone company loses QFZP status in a future year, any gain on pre-CT assets would be taxed at 9%. The transitional election protects against that risk by locking in the fair value as the cost base.

For free zone companies that do maintain QFZP status, the election has no immediate impact because qualifying income is taxed at 0%. But it serves as insurance if the company’s circumstances change, if it is sold, or if the QFZP regime is modified in the future.

What Is the Deadline for Making the Transitional Election?

Ministerial Decision No. 120 of 2023 does not specify a separate deadline for the election. The election is made as part of preparing the corporate tax return for the first tax period. For most businesses with a calendar year ending December 31, 2024, the first CT return is due by September 30, 2025. For businesses with a June year-end whose first tax period started June 1, 2023, the deadline has already passed.

For businesses whose first tax period is the calendar year 2025 (because they were incorporated in 2025), the CT return deadline is September 30, 2026. The transitional election for these businesses uses the opening balance at January 1, 2025.

The critical point is that the election is made when filing. There is no advance notification to the FTA. But the supporting valuation documentation must be prepared before the filing date.

What Documentation Must You Keep for the FTA?

The FTA can audit the transitional election for up to 5 years after the filing deadline (extended to 7-14 years in cases of fraud or non-filing under Cabinet Decision No. 17 of 2026). Businesses must retain:

The closing balance sheet of the pre-CT financial year (used as the opening balance)
Independent valuation reports for each asset class where fair value was elected
Board resolution or management decision documenting the election
Calculations showing the difference between historic cost and fair value
Supporting evidence for related party transaction arm’s length values
Working papers showing how the elected values were reflected in the CT return

Under Article 56 of FDL 47/2022, all corporate tax records must be retained for at least 7 years from the end of the relevant tax period.

What Are the Common Mistakes Businesses Make with Transitional Rules?

Based on first-filing season experience, these are the errors that cost businesses the most:

Not making the election at all. Many businesses and their accountants do not realize the election exists, defaulting to historic cost and paying tax on pre-CT gains unnecessarily.
Using incorrect valuation dates. The fair value must be at the start of the first tax period, not the date the CT return is prepared. A 2025 valuation report cannot be used for a January 1, 2024 opening balance.
Applying the election selectively within a class. If you elect fair value for one commercial property, you must elect it for all immovable property. Cherry-picking is not permitted.
Forgetting arm’s length adjustments. Pre-CT transfers between related parties at below-market value must be adjusted under Article 61(2). Failing to do this invites FTA scrutiny.
No supporting valuation report. Claiming fair value without an independent valuation report gives the FTA grounds to reject the election and reassess on historic cost.
Ignoring intangible assets. Many businesses focus only on property but overlook trademarks, goodwill, and customer relationships that may have significant value.

How Does the Transitional Election Interact with Small Business Relief?

Businesses that elect Small Business Relief (SBR) under Ministerial Decision No. 73 of 2023 pay 0% corporate tax on revenue up to AED 3,000,000. For these businesses, the transitional election has no immediate impact because no tax is payable regardless of the cost base.

However, SBR is only available for tax periods ending on or before December 31, 2026. From 2027 onwards, all businesses with revenue above AED 375,000 will pay 9%. If a business currently on SBR holds appreciating assets, making the transitional election now protects against future tax when SBR expires and the asset is eventually sold.

The election must be made in the first CT return, not in a later year. Waiting until SBR expires means the opportunity is permanently lost.

Frequently Asked Questions

Is the transitional election mandatory or optional?

The election is entirely optional. Businesses can choose to keep historic cost as the base for all pre-CT assets. However, for assets that appreciated significantly before corporate tax started, electing fair value almost always results in lower tax on future disposals.

Can I make the election for immovable property but not for financial assets?

Yes. The election is made per asset class. You can elect fair value for immovable property while keeping historic cost for financial assets, or vice versa. But within each class, the election must apply to all assets in that category.

What if my business started after June 1, 2023?

Businesses incorporated after the CT law took effect do not have a pre-CT period. The transitional rules under Article 61 and MD 120/2023 do not apply because all asset acquisitions occurred during the CT era.

Does the election apply to assets acquired through a merger or restructuring?

If the merger or restructuring occurred before the first tax period and the assets were held at historic cost, the transitional election can apply. If the restructuring used Article 27 business restructuring relief, the net book value carried over becomes the starting point, and the fair value election adjusts from there.

How do I value goodwill for the transitional election?

Goodwill must be valued by a qualified business valuer using accepted methods such as discounted cash flow or excess earnings approach. The valuation date must match the start of the first tax period. Internally generated goodwill that was never recorded on the balance sheet cannot be elected because it was not part of the closing balance sheet under Article 61(1).

What if the FTA disagrees with my fair value?

The FTA can challenge the elected fair value during an audit. If the FTA determines the value was overstated, it can adjust the cost base downward and reassess the tax. Having an independent valuation report from a qualified valuer significantly reduces this risk. If you disagree with the FTA’s adjustment, you can file a reconsideration request within 40 business days under Article 29 of FDL 28/2022.

Can a Tax Group make the election for individual members?

Each member of a Tax Group under Articles 40-42 of FDL 47/2022 makes its own transitional election. The parent company does not make a blanket election for the entire group. Each member entity must evaluate its own pre-CT assets and elect independently.

Does the election affect depreciation going forward?

Yes. If you elect fair value as the cost base, future depreciation is calculated on the elected fair value, not the original cost. This increases annual depreciation deductions, further reducing taxable income in future periods. For example, a building originally costing AED 5,000,000 with elected fair value of AED 8,000,000 generates higher depreciation charges from the first tax period onwards.

Is there a minimum asset value to qualify for the election?

No. Ministerial Decision No. 120 of 2023 does not impose a minimum value threshold. Even small investments and minor intangible assets qualify if they were held before the first tax period and recorded at historic cost.

What if I already filed my first CT return without making the election?

If the filing deadline has passed and the election was not made, the opportunity is permanently lost for that tax period. A voluntary disclosure under Article 10 of Federal Decree-Law No. 28 of 2022 may allow correction if the return is amended before the FTA initiates an audit, but this depends on the specific circumstances and should be reviewed with a tax consultant.

Need Expert Help?

Qaspro Global’s corporate tax consultants help businesses evaluate pre-CT assets, obtain independent valuations, and make the transitional election correctly in the first CT return. With the September 30, 2026 deadline approaching for many businesses, acting now prevents costly mistakes. Contact us today for a free consultation, or message us directly on WhatsApp.