UAE Corporate Tax Relief for Small Businesses
Article 21 of the UAE Corporate Tax Law provides relief for small businesses in the UAE
The UAE Ministry of Finance recognized the importance of small enterprises to the economy and incorporated ‘Small Business Relief’ into the new corporation taxation structure when it went into effect on June 1, 2023. Under specific circumstances, this recent ministerial order exempts firms from paying the CT.
It is a calculated move that acknowledges the particular difficulties small companies in the Middle East confront. Companies are able to invest more in their expansion and development when the tax burden is reduced, which boosts the economy of the nation.
What is UAE Corporate Tax Relief for Small Businesses?
One of the provisions in Article 21 of Federal Decree-Law No. 47 of 2022 is Small Business Relief. Eligible small enterprises will not be required to pay corporate taxes throughout the relevant period thanks to this relief. You are qualified for this advantage if your company is based in the United Arab Emirates, has revenues under AED 3 million during a tax period, and satisfies additional requirements.
This does not imply that you will not file tax returns; rather, it eliminates the need to calculate taxable income. You can still manage your financial statements using the cash basis of accounting. A synopsis of small business tax relief is provided below:
What are the requirements for Small Business Tax Relief eligibility?
Your company must fulfill these requirements in order to be eligible for Small Business Tax Relief:
• Revenue Limit: During the tax period, your company’s yearly revenue cannot surpass AED 3 million. Additionally, for every prior tax period that ended on or before December 31, 2026, it must have been below this threshold. You cannot apply for this exemption, for instance, if your business’s revenue exceeds AED 3 million in one year and falls short of that amount in the next year.
• Resident Status: Residents of the United Arab Emirates, including natural and juridical persons incorporated in the country, are eligible for the relief. Free zone residents and legal entities incorporated outside of the UAE but under UAE control and management are also included in this criterion.
• Election for Relief: If your business complies with the requirements, you may be eligible to claim this relief for several consecutive tax periods. To be qualified, though, you have to notify the tax authorities within a certain time frame. You cannot claim the relief later if you file the return without choosing to opt for it.
• Tax Registration Number (TRN): You must register for Corporate Tax and obtain a TRN in order to qualify for the relief. Additionally, you should have records attesting to your eligibility, such as revenue records.
Who can't receive Small Business Relief?
Not all businesses qualify for Small Business Tax Relief under the existing regulations. If you fit into any of the following categories, you are not eligible to apply for “Small Business Tax Relief”:
Multinational Enterprise Group (MNE) members
You are not eligible for this relief if your company is a part of an MNE group that has a combined group revenue of more than AED 3.15 billion and operates in several countries. According to the relevant laws, all MNEs must prepare a Country-by-Country Report.
Any MNE constituent firm that makes contributions to the group’s consolidated financials is subject to this requirement. Unless the entity has been excluded from the consolidated financial reports due to its lack of significance, its size is irrelevant. An MNE’s member entities in the UAE receive particular attention.
Qualifying Free Zone Persons (QFZP)
Since you currently receive 0% corporation tax on your qualifying income, your company is not eligible for the Small Business Tax Relief if it is a QFZP.
A Qualified Free Zone Person (QFZP) is a company if:
• It generates a certain amount of qualifying income and operates extensively in the United Arab Emirates.
• It complies with established transfer pricing guidelines and the Arm’s Length Principle.
• Meet extra requirements for free zone entities, including as revenue constraints, which state that non-qualifying income cannot exceed AED 5 million or 5% of total revenue.
• Its non-qualifying income stays below the de minimis threshold.
Additionally, a QFZP is required to compile audited financial accounts.
Artificial Business Division
In order to stay below the AED 3 million revenue barrier, UAE firms that purposefully engage in corporate restructuring and divide their operations into several sections are not eligible for Small Business Tax Relief.
The entity is required to pay the unpaid corporate tax and any associated penalties if the Federal Tax Authority (FTA) finds that the split was made in order to avoid paying taxes.
How Does Relief for Small Businesses Operate?
The first important thing to realize about Small Business reduction is that the corporation tax reduction it offers is based on taxable income rather than revenue. This implies that if your taxable profits are small, you may still qualify for Small Business Relief even if your company makes a lot of money.
The corporation tax savings your company can achieve by choosing Small Business Relief is displayed in the above table. In the absence of this exemption, your company would not be required to pay corporate tax on the first AED 375,000 in earnings; but, you would be subject to the 9% corporate tax rate on any taxable income over this threshold.
Will VAT registration be affected in any way by Small Business Relief?
The UAE corporation tax’s Small Business Relief program is an independent program that has no bearing on VAT compliance requirements or other initiatives.
You are required to charge the relevant tax on the designated goods or services if your company is registered for Value Added Tax (VAT). Since you are collecting the VAT on behalf of the government, it is not your revenue. The Federal Tax Authority (FTA) must receive the collected sum within the allotted time frames. For company tax purposes, you should thus exclude the amount obtained from your revenue calculation.
Small Business Relief's Effect on Other Corporate Tax Laws
Knowing which other business tax laws and perks you are not eligible to apply is crucial if you choose to use the Small Business Relief. Businesses who use this relief are exempt from the following sections of CT:
• Tax Losses: Typically, companies can lower their tax liability by carrying forward their tax losses to offset future taxable income. However, as you are deemed to have no taxable income if you select Small Business Relief, you are unable to carry forward or offset tax losses.
• General Interest Deduction Limitation Rules: In order to avoid excessive deductions, the deductibility of interest expenditures is normally regulated. These regulations do not, however, apply when your company receives Small Business Relief as taxable income is not being determined.
• Exempt Income: According to corporate tax regulations, income derived from specific company operations is exempt. The entire business income is considered non-taxable when you choose Small Business Relief. This clause eliminates the need for several exemptions. For instance, your entire revenue is already regarded as non-taxable under Small Business Relief, even though investment income may normally be exempt.
• Additional Reliefs: A number of additional corporate tax reliefs, such as investments in specific assets, are intended to lower your taxable income. These further reliefs are no longer applicable if you choose Small Business Relief because your income is no longer subject to taxes.
• Deductions: When determining taxable income, the standard business deductions for costs and expenses apply. However, since your business revenue is exempt from CT, deductions for things like rent, salary, or utilities do not apply under Small Business Relief.
• Transfer Pricing Documentation: Businesses in the United Arab Emirates must keep records attesting to the arm’s length principle being followed in their dealings with connected parties. Small Business Relief exempts several companies from this obligation.
• Tax Groups and Small Business Relief: In the United Arab Emirates, organizations that belong to a tax group are permitted to combine their taxable profits and losses. For corporation tax reasons, your business cannot be a member of a tax group if you choose the Small Business exemption.