Mastering Accounting Standards in the UAE: A Guidance towards Corporate Tax Compliance

 Case Study : Deduction of Capitalized Expenditure
 
Background:
In Tax Period 1, Company A, a taxable entity, purchases a piece of land for AED 3,000,000 and incurs fees of AED 90,000 to a real estate agent. According to International Financial Reporting Standards (IFRS), the fees of AED 90,000 are capitalized, meaning they are treated as part of the acquisition cost of the land, totaling AED 3,090,000.

Tax Treatment:
Since the fees are capitalized under IFRS, they are not deductible in Tax Period 1 as they are considered capital expenditure. Thus, Company A adds these fees to the acquisition cost of the land, resulting in a total cost of AED 3,090,000.

Realization Event:
In Tax Period 4, Company A sells the land for AED 3,300,000. At the time of disposal, Company A deducts the capitalized fees from the sale proceeds to calculate the taxable gain.

Calculation:
Taxable gain = Sale proceeds – Acquisition cost (including capitalized fees)
Taxable gain = AED (3,300,000 – 3,090,000) = AED 210,000

Conclusion:
By deducting the capitalized fees from the sale proceeds, Company A accurately calculates the taxable gain on the disposal of the land. This approach ensures that only the net gain attributable to the land transaction is subject to taxation, reflecting the economic reality of the transaction and complying with tax regulations.

Disclaimer:
The content provided in this document offers general guidance and should not be construed as legal, financial, or tax advice. It is recommended to consult qualified professionals for personalised guidance. While efforts have been made to ensure accuracy, no guarantee is provided for completeness or applicability to individual situations. Users are responsible for interpreting and taking actions based on this information, at their own risk.