IAS 40 – Investment Property and Their Tax Implications

Introduction: Why IAS 40 Matters to MENA CFOs and Finance Executives

Investment property is a cornerstone of wealth creation across the MENA region—underpinning sovereign portfolios, corporate balance sheets, and private investments alike. From Dubai’s premium real estate to Riyadh’s ambitious giga-projects, property as an investment vehicle carries significant accounting and taxation considerations. For finance leaders, IAS 40 is more than an accounting standard—it is a strategic tool that can materially influence profitability, tax efficiency, and investor confidence.

1. Understanding IAS 40: Core Principles and Application

IAS 40 defines investment property as land or buildings—whether owned or held under a lease—that are held for rental income or capital appreciation, rather than for use in production, administrative operations, or sale in the ordinary course of business.

Initial Recognition and Measurement

Investment properties are initially recognized at cost, encompassing purchase price and directly attributable expenditures (e.g., professional fees, transaction taxes), but excluding costs such as start-up losses.

Subsequent Measurement Models

Entities must elect a single accounting model for subsequent measurement of investment properties:

- Fair Value Model: Assets are remeasured at fair value at each reporting date, with changes recognized in profit or loss. This provides a transparent reflection of market conditions but introduces income volatility.

- Cost Model: Properties are carried at cost less accumulated depreciation and impairment, with fair value disclosed in the notes. This approach stabilizes earnings but may obscure current market values.

Transfers and Reclassification

Transfers to or from investment property are permissible only upon a demonstrable change in use, substantiated by observable events—not mere management intent.

2. Tax Implications: A MENA Perspective

UAE’s Ministerial Decision on Tax Depreciation for Fair Value Models

On 23 June 2025, the UAE Ministry of Finance issued Ministerial Decision No. 173 of 2025, granting taxpayers applying the fair value model the ability to claim tax depreciation—despite the absence of depreciation charges in their financial statements.

- Mechanism: Annual deduction based on the lower of 4% of historical cost or the opening tax written-down value.

- Condition: Taxpayer must adopt the realization basis of taxation and make an irrevocable sub-election.

This development ensures parity between cost and fair value users and prevents punitive tax treatment of unrealized gains.

Realization vs. Accrual Basis of Taxation

- Accrual Basis: Taxable income incorporates unrealized gains/losses recognized under IAS 40. While aligned with accounting, this may lead to taxation of unrealized appreciation.

- Realization Basis: Taxable income reflects only realized gains/losses (e.g., upon sale). This mitigates volatility and cash flow strain, particularly beneficial in markets with fluctuating valuations.

Combined, the realization basis and new depreciation provisions provide a robust framework for managing tax exposures in the UAE—arguably one of the most progressive treatments in the region.

3. Strategic Considerations for Finance Leaders

Conclusion: Aligning Standards with Strategy

For finance leaders in MENA, IAS 40 is not merely a compliance requirement—it is a strategic choice. The accounting model adopted will influence reported earnings, tax liabilities, and stakeholder perceptions. With the UAE’s recent legislative developments, entities now have the tools to reconcile fair value transparency with tax efficiency—provided they make informed, timely elections. Across the region, a nuanced understanding of IAS 40, coupled with proactive tax planning, is essential to unlocking the full potential of investment property portfolios.