Small businesses in the UAE with revenue of Dh3 million ($816,880) or less can benefit from a new corporate tax relief program, the UAE’s Ministry of Finance said on April 6th
This follows last year’s UAE introducing the federal corporate tax with a standard statutory rate of 9 percent and in December issuing the federal corporate tax law, bringing the income of companies exceeding Dh375,000 ($102,000) into the corporate tax bracket.
Essentially, UAE’s Ministry of Finance has raised the minimum threshold for corporate tax from $102,000 to $816,000 (AED3 million) for small and micro businesses, startups, and freelancers.
Read: Uncovering the mysteries behind UAE’s looming corporate tax
According to Fazeela Gopalani, Head of ACCA Middle East, telling Economy Middle East: “Under the initiative, taxable persons that are resident persons can claim Small Business Relief where their revenue in the relevant tax period and previous tax periods is below Dh3 million for each tax period. This initiative will allow small or micro businesses to benefit further by reducing their corporate tax burden and compliance costs.”
Fazeela added: “Once a taxable person exceeds that threshold in any tax period, they will no longer be eligible for the scheme.”
Tyne Hugo, senior associate at BSA, a UAE law firm answered the following questionnaire for Economy Middle East.
What is the relief that these businesses will get? Does the ministry mean no taxes will be paid?
In effect, for corporate tax, yes that is correct. Entities that meet the requirements set out by the Ministry, will be treated as not having derived any taxable income in a given period where the revenue did not exceed the threshold, namely AED3,000,000 (SME Relief). Revenue will be calculated using applicable accounting standards in the UAE. This is in accordance with Article 21 of Federal Decree-Law No.47 of 2022 on Taxations of Corporations and Businesses (CT Law). This exemption is only valid for the tax periods starting June 1, 2023, to December 31, 2026.
This SME Relief is designed to assist start-ups and small entities (SMEs) in the highly competitive environment of the UAE. However, it must also be noted that it only applies to Corporate Tax and it will not apply to other applicable taxes such as VAT and Excise tax. It will further not apply to Qualifying Freezone Persons nor multi-nationals (as these entities are defined by the Ministry).
When does then the 9% apply to qualifying businesses that earn AED 375,000 or more, which is less than AED 3 million?
As mentioned above, the periods for which the SME Relief will apply are from June 1, 2023, to December 31, 2026. Accordingly for any period after December 31, 2026, as things stand, 9% will become payable on all taxable income above AED375,000. This being said there are circumstances whereby the 9% may apply anyway to SMEs. This would be in cases where the SME has elected not to apply for the exemption for a certain period or whereby, they become disqualified from the exemption. Disqualification can happen when an SME earns more revenue than AED3,000,000 for a certain tax period, even if their usual revenue is far below that amount. Should their revenue exceed AED3,000,000, they will of course not be able to claim the exemption.
A second instance will be in cases where some businesses, whose current usual revenue exceeds AED3,000,000 per annum, have attempted to artificially separate the business into different entities to try and obtain SME Relief. Such attempts by businesses will be considered an arrangement to obtain a Corporate Tax advantage under Article 50 of the CT Law. They will be liable for the 9% tax and associated penalties.
What if companies decide not to take advantage of this? Are there advantages to ignoring the relief scheme?
There are instances where some companies that otherwise qualify for SME Relief may elect not to proceed with applying for the benefit. It will be in cases where the SME wishes to carry forward any incurred tax losses and any disallowed net interest expenditure for use in future tax periods. It must be noted that to qualify your revenue must be below AED3,000,000. This is not the same as taxable income. An SME can have a revenue of AED2,500,000 but still make a loss.
In such cases, it may be far more beneficial to carry that loss forward and reap its benefit in the next tax period than applying for SME Relief. This is especially true as the relief would not assist in any event given that the taxable income in such cases would be negative. However, in most cases where SMEs are making profits and have revenue below AED3,000,000, it would not be advisable to ignore the offered SME Relief.
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