For businesses holding investment property under IAS 40 using the fair value model, the accounting and tax treatment can look very different.
Under IAS 40, an investment property measured using the fair value model is remeasured at fair value at the end of each reporting period, with changes generally recognised in profit or loss. Unlike the cost model, the fair value model does not record ordinary depreciation in the financial statements.
That created an important question for UAE Corporate Tax: if no accounting depreciation is recorded, can a business obtain a depreciation deduction for tax purposes?
The answer changed with Ministerial Decision No. 173 of 2025 (MD 173), issued on 23 June 2025, which allows qualifying taxpayers to claim a Corporate Tax depreciation deduction of up to 4% of the original cost of eligible investment property held at fair value. It applies to Tax Periods starting on or after 1 January 2025.
What is MD 173 of 2025?
MD 173 is titled “Depreciation Adjustments for Investment Properties held at Fair Value for the Purposes of Federal Decree-Law No. 47 of 2022.” It creates a tax adjustment mechanism for qualifying investment properties accounted for at fair value.
Why was MD 173 introduced?
To understand the significance of MD 173, it is useful to look at the difference between the two IAS 40 measurement models.
Under IAS 40, after initial recognition, an entity generally chooses either:
- the fair value model, or
- the cost model.
Under the fair value model, investment property is measured at fair value and changes in fair value are recognised in profit or loss.
Under the cost model, investment property is carried at cost less accumulated depreciation and impairment, subject to the applicable accounting requirements.
This means that two businesses could own economically similar investment properties but have different accounting presentations.
For example:
| Company A — Fair Value Model | Company B — Cost Model |
|---|---|
| Original cost: AED 10 million Fair value at year-end: AED 12 million Accounting depreciation: generally not recorded under the IAS 40 fair value model Fair value gain: AED 2 million | Original cost: AED 10 million Accounting carrying amount is reduced through depreciation and impairment where applicable Fair value is disclosed rather than used as the carrying amount |
MD 173 provides a specific Corporate Tax mechanism for qualifying taxpayers using the fair value model.
The objective is broadly to address the difference in tax treatment between qualifying investment properties accounted for at fair value and those accounted for using the cost model.
How Article 20 fits in ?
Article 20 is central to understanding MD 173.
Under Article 20 of the UAE Corporate Tax Law, taxable income is generally determined starting from accounting income, subject to the adjustments prescribed by the Corporate Tax Law and relevant decisions.
Article 20(3) allows a taxable person that prepares financial statements on an accrual basis to elect to take gains and losses into account on a realisation basis in relation to:
- all assets and liabilities subject to fair value or impairment accounting; or
- certain assets and liabilities held on capital account, while taking into account unrealised gains and losses relating to revenue-account items.
The precise conditions are supplemented by Ministerial Decision No. 134 of 2023.
This realisation-basis election is important because MD 173 is specifically linked to taxpayers that have elected the realisation basis under Article 20(3).
Who can claim depreciation under MD 173?
The rules are not available to every business holding property.
Broadly, the taxpayer must meet the relevant conditions, including:
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1. The taxpayer prepares financial statements on an accrual basis MD 173 specifically applies where the Taxable Person prepares its Financial Statements on an Accrual Basis of Accounting. |
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2. The investment property is held at fair value The property must qualify as Investment Property and be held at fair value under the applicable accounting standards. MD 173 defines Investment Property by reference to IAS 40. IAS 40 generally covers land or buildings, or parts of buildings, held to earn rentals, for capital appreciation, or both, rather than being owner-occupied or held for sale in the ordinary course of business. |
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3. The taxpayer has elected the realisation basis The taxpayer must have elected to take gains and losses into account on a realisation basis pursuant to Article 20(3) of the Corporate Tax Law. |
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4. A separate MD 173 election is required The depreciation election under MD 173 is irrevocable. This is one of the most important points for businesses to consider before making the election. |
How much depreciation can be claimed?
The amount is not simply 4% of the property’s fair value.
This is a critical distinction.
MD 173 provides that the depreciation deduction for an eligible investment property is the lower of:
| A | 4% of the Original Cost |
| B | the Tax Written Down Value at the beginning of the relevant Tax Period |
The 4% amount applies for each 12-month Tax Period, with appropriate prorating where the Tax Period is shorter or longer than 12 months, or where the property is held for only part of the Tax Period.
How much depreciation can be claimed?
Maximum annual depreciation adjustment
4% × Original Cost
But:
Actual deduction
lower of 4% of Original Cost or opening Tax Written Down Value
What is “Original Cost”?
MD 173 specifically defines Original Cost by reference to the term “cost” under IAS 40.
It also includes subsequent capitalised costs, subject to the arm’s-length principle under Article 34 of the Corporate Tax Law.
This means businesses should not simply take the property’s latest fair value and multiply it by 4%.
The relevant starting point is the Original Cost, as determined under the rules.
What is Tax Written Down Value?
MD 173 also introduces the concept of Tax Written Down Value (TWDV).
It is broadly the Opening Value less the aggregate depreciation deduction applied under MD 173.
This becomes particularly important when determining the maximum deduction in later Tax Periods.
Example: How the 4% depreciation works
Consider a company that owns an investment property.
Property details
| Original Cost | AED 10,000,000 |
| The property is accounted for at fair value under IAS 40. | |
| The company qualifies for MD 173 and makes the required election. | |
Year 1
| Calculation | 4% × AED 10,000,000 |
| Result | = AED 400,000 |
| Assuming the opening Tax Written Down Value is higher than AED 400,000, the allowable depreciation adjustment would be: | |
| Allowable adjustment | AED 400,000 |
The company would make the appropriate adjustment when calculating taxable income.
Year 2
The calculation continues under the MD 173 rules.
The taxpayer does not simply reset the property to its current fair value and calculate 4% of that amount.
The tax calculation follows the Original Cost and Tax Written Down Value framework prescribed by the Decision.
This is why maintaining a separate tax depreciation schedule is important.
Is the 4% depreciation recorded in the financial statements?
No — not necessarily.
This is one of the most important points about MD 173.
Under the IAS 40 fair value model, the investment property is measured at fair value and changes in fair value are recognised in profit or loss. The property is not accounted for using ordinary depreciation in the same way as a property under the cost model.
MD 173 instead creates a Corporate Tax adjustment.
Therefore, a business can have:
| No accounting depreciation expense |
| but |
| a tax depreciation adjustment under MD 173 |
| provided all requirements are met. |
This is why the term “tax depreciation adjustment” is more precise than simply saying that IAS 40 fair-value property is now depreciated for accounting purposes.
What happens to fair value gains and losses?
This is where the realisation-basis election becomes particularly important.
The UAE Corporate Tax framework generally starts from accounting income and then makes prescribed adjustments. For taxpayers using the realisation basis, unrealised gains and losses within the relevant scope are generally deferred for Corporate Tax purposes until realisation.
MD 173 works alongside that framework.
In simple terms:
| Accounting | The property continues to be measured under IAS 40. |
| Corporate Tax | The taxpayer applies the relevant realisation-basis adjustments and, if the MD 173 election is made, the permitted depreciation adjustment. |
This means businesses should maintain a clear reconciliation between:
- accounting carrying value;
- fair value movements;
- original cost;
- tax written-down value;
- depreciation deductions claimed; and
- eventual realisation adjustments.
When must the MD 173 election be made?
This is one of the areas where businesses need to be particularly careful.
Scenario 1: The company already holds an investment property
If the Taxable Person holds an Investment Property during the first Tax Period to which MD 173 applies, the election must be made in the Tax Return for that Tax Period.
Scenario 2: The company does not hold an investment property initially
If the taxpayer does not hold an Investment Property during its first Tax Period to which the Decision applies, the election is made in the Tax Return for the Tax Period in which the first Investment Property is held.
Scenario 3: The taxpayer previously used Small Business Relief
Where Article 21 applies, MD 173 provides for the election to be made in the Tax Return for the first Tax Period in which Article 21 does not apply.
What if the election is missed?
This is critical.
Forfeiture
If the election is not made within the prescribed timeline, the taxpayer is considered to have forfeited the right to make the election.
Can the election be made for only one property?
No.
MD 173 provides that once the taxpayer makes the election, it applies to all Investment Properties held at fair value under the applicable Accounting Standards.
This means the taxpayer cannot simply select the properties that produce the most favourable tax result and ignore the others.
This makes the decision to elect particularly important for businesses with multiple investment properties.
What if the company has not previously elected the realisation basis?
MD 173 contains an important exception to the general rule in Ministerial Decision No. 134 of 2023.
A qualifying taxpayer preparing financial statements on an accrual basis may elect to recognise gains and losses on a realisation basis in the same Tax Return in which the MD 173 election is made.
This is an important procedural point because the two elections interact.
A business should therefore assess both:
- whether the realisation-basis election is appropriate; and
- whether the MD 173 depreciation election is appropriate.
The fact that both can be connected in the same Tax Return does not mean the decision should be made automatically.
Does this mean the depreciation is ultimately “clawed back”?
In practical terms, the MD 173 deduction is primarily a timing benefit rather than a permanent tax-free deduction.
The taxpayer obtains the benefit of the depreciation adjustment during the periods in which it is claimed, but the Decision requires appropriate adjustments when the property is realised.
This is an important distinction when assessing the long-term tax effect of making the election.
MD 173 vs the IAS 40 fair value model
The easiest way to understand the interaction is to separate accounting from tax.
| Area | IAS 40 Fair Value Model | UAE Corporate Tax / MD 173 |
|---|---|---|
| Property measurement | Fair value | Tax calculation uses Original Cost/TWDV framework |
| Fair value changes | Recognised in P&L | Subject to relevant Corporate Tax adjustments |
| Accounting depreciation | Generally not recorded under fair value model | Specific tax depreciation adjustment may be available |
| Rate | Not a fixed tax rate | Lower of 4% of Original Cost or opening TWDV |
| Election | IAS 40 accounting policy | MD 173 election is irrevocable |
| Scope | Investment properties | Qualifying fair-value investment properties under MD 173 |
| Realisation | Disposal recognised under accounting rules | Prior MD 173 deductions subject to realisation adjustments |
Is the 4% rate the same as IAS 40 depreciation?
No.
This is another common misunderstanding.
IAS 40 does not establish a universal 4% depreciation rate for investment properties measured at fair value.
Under the fair value model, the property is remeasured to fair value.
The 4% rate comes from MD 173, and it is specifically a Corporate Tax depreciation adjustment.
Therefore, businesses should not describe IAS 40 as requiring a 4% depreciation rate.
What is the potential Corporate Tax benefit?
For a taxpayer subject to the standard UAE Corporate Tax rate, the deduction can reduce taxable income.
For example, if an eligible company has an MD 173 depreciation adjustment of:
| AED 400,000 |
| and the deduction reduces taxable income that would otherwise be subject to the 9% Corporate Tax rate, the mechanical tax reduction could be up to: |
| AED 400,000 × 9% = AED 36,000 |
The actual effect depends on the taxpayer’s complete Corporate Tax computation, including its taxable income, other adjustments, available reliefs and applicable rules.
The UAE Corporate Tax framework currently applies 0% to taxable income up to AED 375,000 and 9% to the portion exceeding AED 375,000.
Note
So the 4% deduction should not be described as a guaranteed 36,000 AED tax saving in every case.
What should businesses do before making the election?
The irrevocable nature of the election means businesses should not treat MD 173 as an automatic tax-saving checkbox.
Before making the election, businesses holding investment property at fair value should consider:
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1. Identify all qualifying investment properties Create a complete property schedule. |
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2. Confirm the accounting treatment Determine whether each property genuinely qualifies as investment property under IAS 40 and whether the fair value model is being applied. |
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3. Determine the Original Cost The MD 173 calculation is based on Original Cost rather than simply the current fair value. |
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4. Calculate the Tax Written Down Value Maintain a separate tax schedule for the MD 173 deduction. |
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5. Review the realisation-basis election Assess the wider Corporate Tax implications of using the realisation basis under Article 20(3). |
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6. Consider all investment properties Because the MD 173 election applies to all qualifying investment properties held at fair value, the decision should be considered at portfolio level. |
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7. Review future disposal plans The expected holding period and potential realisation events can affect the overall tax outcome. |
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8. Review group transfers If properties may be transferred between related entities, Tax Group members or qualifying groups, the transfer provisions need to be considered. |
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9. Maintain supporting records The tax computation should be supported by property records, acquisition documents, capitalised costs, valuations, accounting records and tax adjustment schedules. |
Final Takeaway
Ministerial Decision No. 173 of 2025 is an important UAE Corporate Tax development for businesses holding investment property under IAS 40 using the fair value model.
The key point is simple:
The property can remain accounted for at fair value, while a qualifying taxpayer may claim a separate Corporate Tax depreciation adjustment.
The adjustment is generally the lower of 4% of Original Cost or the opening Tax Written Down Value, subject to the conditions, elections and timing requirements in MD 173.
But remember
the election is irrevocable, applies to all qualifying fair-value investment properties, must be made within the prescribed timeframe and has consequences when the property is eventually realised.
For businesses with significant investment property portfolios, the decision should therefore be evaluated not only as a current-year tax deduction but as part of the property’s full Corporate Tax lifecycle, including accounting treatment, realisation, transfers, related-party transactions and record keeping.
Fintra Global can help businesses assess the Corporate Tax treatment of investment properties, review the MD 173 election, calculate the relevant tax adjustments and maintain the supporting tax schedules.
