UAE Corporate Tax: what changes at the AED 375,000 threshold
How the 0% and 9% bands work and what to prepare before your first return.
The basic idea
IFRS 16 Leases has applied to annual periods beginning on or after 1 January 2019, when it replaced IAS 17. Before then, most office rentals were treated as operating leases: rent went through the income statement and nothing appeared on the balance sheet.
IFRS 16 removed that distinction for tenants. When you sign a lease, you record two things:
- a right-of-use asset, for your right to occupy the office for the lease term, and
- a lease liability, for the rent you have committed to pay.
The rent you pay does not change. What changes is how it is reported, and that affects the ratios your bank, investors and board look at.
How the numbers are measured
The lease liability is the present value of the rent still to be paid. Paragraph 26 of the standard tells you which rate to discount with: the rate implicit in the lease if you can readily work it out, and otherwise your incremental borrowing rate. For an office lease, the implicit rate is rarely known to the tenant, so most companies use their borrowing rate.
That borrowing rate is specific to the lease. The IFRS Interpretations Committee has called it a lease-specific rate: it should reflect the term, the security and the amount of that particular lease. In practice, start from a rate you can observe, such as a bank quote for a similar loan, adjust it for those features, and keep a note of how you got there.
The right-of-use asset starts at the same figure as the liability, then adds rent paid in advance, your own direct costs of arranging the lease, and an estimate of any reinstatement you must do when you leave. Lease incentives you receive, such as a fit-out contribution from the landlord, reduce it.
A worked example
Illustrative figures only. A company signs a three-year office lease at AED 100,000 a year, paid at the end of each year to keep the arithmetic simple. Its incremental borrowing rate is 6%. The present value of the three payments is about AED 267,300, so that is both the starting liability and the starting asset.
| Year | Depreciation | Interest | Total expense | Rent paid |
|---|---|---|---|---|
| 1 | 89,100 | 16,040 | 105,140 | 100,000 |
| 2 | 89,100 | 11,000 | 100,100 | 100,000 |
| 3 | 89,100 | 5,660 | 94,760 | 100,000 |
| Total | 267,300 | 32,700 | 300,000 | 300,000 |
Two things stand out. Over the whole lease, the total expense equals the rent paid. Within the lease, the expense is higher in the early years, because interest is charged on a liability that shrinks as you pay it down. A company with many leases starting and ending at different times will see much of that effect even out.
What moves in your reports
| Measure | Effect of putting the lease on balance sheet |
|---|---|
| Total assets and liabilities | Both go up by the lease amount |
| Gearing and debt ratios | Look higher, because the lease liability counts as debt |
| EBITDA | Goes up, because rent is replaced by depreciation and interest, both below EBITDA |
| Operating cash flow | Goes up, because the principal part of the rent moves to financing activities |
| Total cash | No change at all |
This is why it matters to check how your bank covenants define debt and EBITDA. A covenant written with or without leases can give a very different answer on the same set of accounts.
Interest on the lease liability is shown separately from depreciation. From 2027, IFRS 18 also places that interest in the new financing category of the income statement, below operating profit.
The lease term: where most of the judgement sits
Many office leases here are signed for a year and renewed, often with the expectation of staying for several years. Under paragraph 18 of IFRS 16, the lease term is the period you cannot cancel, plus any extension periods you are reasonably certain to use, plus any periods covered by a break option you are reasonably certain not to use.
So a one-year contract is not automatically a one-year lease. Facts that point towards a longer term include:
- an expensive fit-out you would lose by moving,
- an office that is hard to replace, for example because it is tied to your licence or close to key clients,
- a history of renewing, and a business plan that assumes you stay, and
- high costs of relocating or reinstating the premises.
Rent-free months at the start count as part of the lease term. Get the term right on day one, because it drives both the liability and the depreciation period, and you must revisit it if something within your control changes, such as a major new fit-out.
The two exemptions
A tenant may choose to keep two kinds of lease off the balance sheet and simply expense the payments:
- Short-term leases, with a lease term of 12 months or less at the start. This choice is made for a whole class of asset, so it applies to all your office leases or none. A lease with a purchase option never qualifies.
- Low-value assets, such as laptops, tablets or small office furniture. This choice can be made lease by lease. An office is not a low-value asset.
The short-term exemption depends on the lease term, not the contract length. A one-year office contract you are reasonably certain to renew is not a short-term lease.
Checklist for a new or renewed office lease
- Read the contract for options: renewal, break and purchase options, rent-free periods, increases linked to an index, and reinstatement duties.
- Decide the lease term and write down why, with the facts you relied on.
- Set the discount rate with evidence, such as a recent bank quote for a similar term.
- Deal with service charges. Either split them out of the rent, or choose, for the whole class of asset, to treat the combined payment as lease.
- Build the schedule for the liability, interest and depreciation, and post the opening entry.
- Check covenants and budgets so management knows how EBITDA, debt and cash flow lines will move.
- Review at each year-end whether any event within your control changes the expected term.
The IASB completed its post-implementation review of IFRS 16 in July 2026 and concluded that the standard is working as intended. It is researching ways to reduce the ongoing cost for tenants, but nothing has been proposed yet, so today's rules still apply.
This article is general information based on IFRS 16 as issued by the IASB. It is not advice for your company. Ask Hassan to review your lease accounting or build your IFRS 16 schedules.
Official sources: IFRS Foundation: IFRS 16 Leases · IFRS 16 project summary · Agenda decision on the incremental borrowing rate · Post-implementation review
