Corporate Tax - Key Insights on Small Business Relief

CORPORATE TAX: KEY INSIGHTS ON SMALL BUSINESS TAX RELIEF

The UAE government has implemented a new tax framework, the UAE Corporate Tax (CT), effective from June 1, 2023. While CT imposes a tax on businesses' net profits, there are several provisions offering relief to small businesses, with the Small Business Relief being a prominent feature. This relief allows qualifying small businesses to be treated as if they haven't generated any taxable income within a specific tax period.

Overview of CT and Its Impact on Small Businesses in the UAE:

Small Business Relief proves transformative for small enterprises in the UAE, providing eligible Resident Taxable Persons, both natural and juridical, the option to seek exemption from UAE Corporate Tax, subject to meeting revenue criteria. Those opting for this relief enjoy two significant advantages:

1. Administrative Relief: Eligible entities are relieved from computing their Taxable Income, simplifying tax return filing and record-keeping. They can adopt the cash basis of accounting for preparing Financial Statements, enhancing financial management simplicity.

2. Tax Relief: Businesses choosing Small Business Relief are exempt from paying Corporate Tax on income earned during the Tax Period.

Additional Details about Small Business Relief:

The reduction is applicable for tax years starting after June 1, 2023.

The revenue threshold of AED 3 million applies to tax periods ending on or before December 31, 2026.

Businesses can elect to claim Small Business Relief for a specific tax period by filing a notification with tax authorities.

The relief can be claimed for multiple consecutive tax periods, provided the business continues to meet eligibility criteria.

Eligibility Criteria:

To qualify for Small Business Relief, a Taxable Person must meet specific criteria:

· Revenue must be less than or equal to AED 3,000,000 for the relevant Tax Period and all preceding Tax Periods ending on or before December 31, 2026.

· The election for Small Business Relief must be made within the Tax Return for the respective Tax Period.

· SBR is available to resident persons, including juridical persons incorporated in the UAE (including freezone persons), juridical persons incorporated outside the UAE but controlled and managed from the UAE, natural persons conducting business in the UAE, and persons identified by the cabinet under any decision.

Ineligibility for Small Business Relief:

· While designed for a broad range of small businesses, Small Business Relief has exceptions:

· Members of Multinational Enterprise Groups (MNEs) with a total consolidated group revenue exceeding AED 3.15 billion are ineligible.

· Qualifying Free Zone Persons, enjoying a 0% Corporate Tax rate on Qualifying Income, are ineligible.

How Small Business Relief Works:

Eligible Resident Persons are considered to have no Taxable Income for the relevant Tax Period if their Revenue falls within the specified threshold. Consequently, they are exempt from paying Corporate Tax during that period, with the relief amount depending on profitability.

Impact on Other Corporate Tax Rules:

Businesses opting for Small Business Relief are excluded from applying specific Corporate Tax reliefs and rules, such as Tax Loss Rules or the General Interest Deduction Limitation Rule for that Tax Period, as these are linked to the calculation of Taxable Income, which Small Business Relief effectively eliminates for eligible entities.

Small Business Tax Relief Measures:

A business must meet specific conditions to be eligible for Small Business Relief, including being a resident person in the UAE, having revenue below AED 3 million for the relevant and previous tax periods, and not being a financial institution or a holding company. Eligible businesses are exempt from paying CT on profits and face reduced compliance requirements, including simplified transfer pricing rules.

In conclusion, Small Business Relief proves to be a valuable tax benefit for small businesses in the UAE, aiming to reduce business costs and facilitate growth. However, businesses must judiciously assess the benefit of claiming relief in each tax period based on factors like taxable profits, interest costs, and available tax reliefs. The intention behind this tax relief is to support local businesses with lower annual revenue and decrease their costs to foster thriving success.