UAE Depreciation

Depreciation in the New Corporate Tax Era

The UAE Federal Corporate Tax Law (Federal Decree-Law No. 47 of 2022) marked a fundamental shift for businesses operating in the UAE. Before its effective date of 1 June 2023, there was no federal corporate income tax for most businesses, so depreciation had no direct tax impact. Emirate-level taxes applied only to branches of foreign oil companies and foreign banks at negotiated rates. Since June 2023, mainland UAE businesses with taxable income above AED 375,000 pay 9% corporate tax, making depreciation treatment directly relevant to tax planning for the first time for most UAE entities. Under the UAE CT Law, businesses follow IFRS to determine taxable income, with limited adjustments specified in the law. Depreciation recognised under IFRS 16 for right-of-use assets and IAS 16 for property, plant and equipment is generally accepted for tax purposes, with no separate prescribed tax depreciation schedule — meaning the accounting method chosen under IFRS directly determines the tax deduction.

Free Zone Companies: Qualifying Income and Asset Allocation

Qualifying Free Zone Persons (QFZPs) benefit from a 0% CT rate on qualifying income — defined as income earned from transactions with non-UAE parties or other free zone entities for qualifying activities such as manufacturing, logistics, and headquarters services. To retain QFZP status, a company must not earn income from mainland UAE beyond a de minimis threshold (5% of total revenue or AED 5 million, whichever is lower). Depreciation on assets used wholly in qualifying activities is a standard deduction against QFZP income. Assets used partially for excluded activities must be apportioned. A Dubai South logistics company with AED 20 million in assets must carefully allocate depreciation between free zone and mainland operations, as misallocation could jeopardise its qualifying status and subject all income to the standard 9% rate retroactively for the entire tax period.

Transfer Pricing and the Cost Base of Intercompany Asset Transfers

The UAE CT Law introduced OECD-aligned transfer pricing rules, directly affecting intercompany asset sales that establish the depreciable cost base in UAE entities. Group companies selling assets to UAE affiliates must do so at arm's length prices, and the UAE recipient's depreciation deductions are limited to the arm's length value of the asset. This applies to tangible assets (machinery, vehicles, equipment) and intangible assets (IP, software licences, brand licences). For multinational groups with UAE subsidiaries, reviewing the cost base of transferred assets in light of the new transfer pricing documentation requirements — Master File and Local File, with thresholds set at AED 200 million consolidated revenue for Master File and AED 100 million for Local File — is now a compliance priority alongside depreciation planning under the FTA's Ministerial Decision No. 97 of 2023.