As mentioned above, to apply the Transitional Rules relief, the QIP needs to be owned by the developer before it becomes subject to CT. In this regard, the FTA has clarified the following:

Under these provisions, it has been confirmed that for real estate developers, a real estate project—or any component thereof, such as land, a specific property, or a building—whether completed or still under construction, qualifies as immovable property.

• Land parcels: Land parcels acquired before the first Tax Period, on which construction of buildings commences on or after the first Tax Period, will be considered as QIP. In this case, only the land parcels will be considered the QIP, as these are the only elements of the real estate project that existed prior to the first Tax Period.
• Under-construction properties: In cases where construction commenced before the first Tax Period and continues after its start, the ongoing construction will be considered as QIP. In this case, the QIP is considered the whole real estate project (i.e. the land element and the properties under construction).
• Fully constructed projects before the start of the first Tax Period: Fully constructed projects completed before the start of the first Tax Period will also be considered as QIP as long as they are sold or intended to be sold after the start of the first Tax Period.

The FTA also clarified that any gain arising from the disposal (or deemed disposal) of any element of a real estate project that did not exist before the first Tax Period, meaning it was not recognized in the opening balance sheet, cannot be adjusted under the Transitional Rules, as such an element does not qualify as QIP.

On the other hand, if construction of a real estate project commenced before the first Tax Period and it extends beyond its start, an adjustment under the Transitional Rules may be available for the project as a whole, as it would meet the definition of QIP.

The market value of each QIP, as of the start of the first Tax Period, must be determined by the relevant government authority in each Emirate (e.g. the DMA in Abu Dhabi or the DLD in Dubai). Valuations may also be conducted by accredited third-party valuers authorized by these authorities.

Valuations from unauthorized parties will not be accepted for calculating the Transitional Rules adjustment. Importantly, the market value must relate only to the QIP for the purpose of determining the excluded gain.

Therefore, if the market value at the time of computing the adjustment does not only relate to QIP, it would not be considered acceptable for the purposes of the adjustment under the Transitional Rules, unless reasonable adjustments are made.

As per MD 120, the election to apply the Transitional Rules needs to be made for each QIP. As per the FTA criteria, a QIP may refer to either an entire real estate development or specific units within a project. The adjustment on Transitional Rules must be calculated separately for each QIP and aligned with the timing of accounting profit recognition.

In line with CTP0099 and the clarifications provided by the FTA, a four-step process is required to determine the excluded gain under the valuation method for each QIP:

• Step 1: Calculate the total excluded gain by subtracting the higher of the original cost or net book value from the market value (adjusted if necessary) at the start of the first Tax Period.
• Step 2: Apportion the excluded gain across the relevant Tax Periods based on revenue recognition in accordance with applicable accounting standards, such as the percentage-of-completion method under IFRS 15.
• Step 3: Determine the attributable accounting profits, which will require that, if only part of the project qualifies (e.g. where the land was held but construction had not begun before the first Tax Period), the portion of accounting profits attributable to the QIP (e.g. the land) must be determined on a fair and reasonable basis. No adjustment under the Transitional Rules is allowed in a Tax Period where this attributable amount results in an accounting loss.
• Step 4: The excluded gain calculated in prior steps is applied to offset the accounting profits determined for each relevant Tax Period, up to the amount of those profits. Any unused portion of the excluded gain cannot be carried forward and will be forfeited.

• Real estate developers can apply the Transitional Rules on an entire developmental project instead of unit-by-unit basis. This significantly reduces tracking requirements for taxpayers and the level of detail to be submitted in the CT Return.
• Transitional relief needs to be carried forward to future years based on the percentage of completion expected in upcoming periods.
• Market valuation should be determined by the relevant government authorities (DLD or DMA) in the UAE or by third parties authorized by these authorities. Valuations performed by unauthorized or unqualified agents will not be valid for the purposes of applying the Transitional Rules relief.
• Market valuation must be adjusted for immovable property that will not be disposed of to customers or that is not part of the QIP.
• Taxpayers should review their calculations of the transitional relief as submitted in CT Returns to date and assess whether the adjustments align with CTP009.

Given the complexity and one-time nature of the transitional relief election in the FY 2024 CT Return, it is essential for real estate groups to ensure alignment with the newly issued CTP009 guidance.

Our team has extensive experience advising on UAE CT matters and has supported some of the largest real estate developers in the country in applying transitional relief effectively. Leveraging our deep sector knowledge and technical expertise, we can:

• Evaluate eligibility and application of the relief at project level.
• Validate valuation approaches in line with FTA requirements.
• ⁠Review FY 2024 CT Returns to ensure compliance with CTP009

For tailored support, please contact your KPMG advisor or the team listed below.