RFZ is a renowned tax consulting company in the UAE specializing in small business tax relief matters. The firm assists small businesses in steering the complexities of the UAE’s new Corporate Tax (CT) Small Businesses Relief regulations. In this blog, we will provide detailed insights into the legal changes made by the Ministry of Finance in the UAE for CT Relief for small businesses.
CT on Small Businesses – Small Business Relief
On June 1, 2023, the United Arab Emirates (UAE) government introduced a new tax regime known as UAE Corporate Tax (CT). The CT is a tax imposed on the net profits of businesses operating in the UAE. However, to support small businesses, the government has introduced several reliefs, one of which is the Small Business Relief.
The Small Business Relief is a tax exemption designed exclusively for small businesses that meet certain criteria. Under this relief, a small business can be treated as having derived no taxable income within a tax period. Small businesses can claim a complete exemption from paying corporate Tax on their net profits. And also which can significantly reduce their overall tax liability.
To qualify for the Small Business Relief, businesses must meet certain eligibility criteria, such as having an annual income below a certain threshold. This relief aims to support small businesses and encourage entrepreneurship, which is a key driver of economic growth in the UAE.
A brief overview of CT and its impact on small businesses in the UAE
Small Business Relief is a significant development for small businesses in the UAE. This relief allows eligible Resident Taxable Persons. And both natural and juridical, to claim exemption from UAE Corporate Tax if their Revenue meets a specific set of criteria. Once this relief is elected, businesses can benefit from two major advantages:
Eligible entities are no longer required to calculate their Taxable Income, simplifying their tax return filing and record-keeping processes. They can even prepare their Financial Statements using the cash basis of accounting, which makes financial management more straightforward.
Businesses opting for Small Business Relief are not required to pay any Corporate Tax on income earned during the Tax Period.
Here are a few more technical details about Small Business Relief:
- The reduction is available for tax years from June 1, 2023.
- The revenue threshold of AED 3 million will apply to tax periods that end before or on December 31, 2026.
- A business can claim the Small Business Relief for a particular tax period by filing a notification with the tax authorities.
- The relief can be claimed for multiple consecutive tax periods if the business meets the eligibility criteria.
What is the eligibility criteria?
To qualify for Small Business Relief, a Taxable Person must meet specific criteria outlined by the Federal Tax Authority.
- The Revenue generated by the business must be less than or equal to AED 3,000,000 for the relevant Tax Period and all previous Tax Periods ending on or before December 31, 2026. This means businesses with a higher revenue than the stated amount will not be eligible for the relief.
- The election for Small Business Relief must be made within the Tax Return for the respective Tax Period. This means that businesses that do not include the election for Small Business Relief in their Tax Return will not be considered eligible for the relief.
- It should be noted that Small Business Relief is available to resident persons, inclusive of juridical persons incorporated in the UAE, including free zone persons, juridical persons incorporated outside the UAE but controlled and managed from the UAE, any natural person who carries out business or related activity in the UAE, and any person as identified by the cabinet under any decision.
Meeting all the above criteria is essential to qualify for the Small Business Relief.
Ineligibility for Small Business Relief
While the Small Business Relief program offers benefits to a broad spectrum of small businesses, certain exceptions apply:
1. Members of Multinational Enterprise Groups (MNEs): Companies within an MNE with a total consolidated group revenue exceeding AED 3.15 billion are ineligible for Small Business Relief.
2. Qualifying Free Zone Persons
3. To maintain this status, Qualifying Free Zone Persons must meet specific criteria.
How Does Small Business Relief Work?
Small Business Relief designates eligible Resident Persons as having no Taxable Income for the relevant Tax Period if their Revenue falls within the specified threshold. Consequently, they are exempt from paying corporate taxes during that period. The relief amount depends on the profitability of these businesses.
Impact on Other Corporate Tax Rules
Businesses opting for Small Business Relief are exempted from other Corporate Tax reliefs and rules. Notably, they cannot apply Tax Loss Rules or the General Interest Deduction Limitation Rule for that Tax Period. Since these reliefs are tied to the calculation of Taxable Income, which Small Business Relief effectively eliminates for eligible entities.
Small Business Tax Relief Measures
To be eligible for Small Business Relief, a business must meet the following conditions:
1. Be a resident person in the UAE.
2. Have Revenue for the relevant tax period and previous periods of AED 3 million.
3. Not be a financial institution or a holding company.
Meeting these criteria exempts a business from paying Corporate Tax on its profits, and it also entails reduced compliance requirements, such as simplified transfer pricing rules.
How to apply for small business relief in the UAE?
The provision of small business relief is discretionary and has to be opted when submitting the tax return. Which is due within 9 months from the end of the tax period. However, there is no requirement for immediate action during the Corporate Tax registration or the tax period.
Spots to Oversee
Small and medium-sized enterprises (SMEs) and start-ups often face issues with tax regulations, such as the inability to carry forward tax losses. Or excess interest costs under Small Business Relief. Eligibility for relief is determined only at the time of the tax return. And also making it difficult for businesses to forecast their ability to carry forward losses or interest costs after the end of the first tax period.
To prove eligibility for Small Business Relief, business owners are required to maintain records such as bank statements, sales ledgers, invoices, order records, and business correspondence. These records should be maintained for seven years, either physically or electronically, from the end of the tax period.
If eligible for Small Business Relief, the non-deductibility of expenses, including the owner’s salary, should be fine with the business and its eligibility for relief.
Business owners need to remain cautious and refrain from attempting to artificially split their businesses into multiple entities to remain eligible for Small Business Relief. Artificial separation could be functional, geographical, or temporal. The Federal Tax Authority (FTA) can examine financial, economic, and organizational links to determine artificial separation and impose penalties accordingly.
Preparation
The Small Business Relief program has been established to alleviate the burden of corporate tax compliance during the initial stages of the tax regime. This program applies to financial years ending on or before December 31, 2026. Business owners are advised to utilize the next three years to prepare themselves. And ensure full compliance with the tax regulations. It is essential to stay ahead of the curve and be well-prepared for comprehensive tax compliance in the future.
Information On Small Business Relief Is Released By The Ministry Of Finance
The UAE Ministry of Finance (MoF) has issued Ministerial Decision No.73 of 2023 specifying details on the Small Business Relief under the Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses (CT Law). The Decision will become effective 15 days following its publication.
Article 21 of the CT Law introduces a Small Business Relief mechanism to promote investment in the UAE and support small businesses. A tax resident can choose to be treated as having no taxable income in a tax period. Additionally, the Relief provides a Taxable Person with reduced compliance requirements, including transfer pricing.
However, the CT Law needed to use a clarification threshold and the eligibility criteria for the Relief. Fortunately, the recent Ministerial Decision clarified these issues. It’s important to note that the Relief will not be available to Qualifying Free Zone Persons. Or Multinational Enterprises Groups (MNE Groups) members with consolidated group revenues exceeding AED3.15 b (as defined in Cabinet Decision No. 44 of 2020).
Threshold for Small Business Relief
Individuals who meet the definition of a taxable UAE resident, as outlined in the CT Law, can claim Small Business Relief provided their revenue for the current. Also, preceding tax periods is at most AED 3,000,000 during each relevant tax year.
Accounting standards accepted in the UAE determine revenue for the relevant tax year. The UAE does not have its own Generally Accepted Accounting Principles (GAAP), so International Financial Reporting Standards (IFRS) are commonly used.
If the above-mentioned threshold is exceeded, the taxable individual will be subject to UAE CT at the relevant rates of 0% / 9% (for revenue exceeding AED 375,000) as provided under the CT Law.
What is the Applicability and Duration of the Small Business Relief?
As per the Ministerial Decision, the revenue threshold will become applicable from 1 June 2023 onwards. However, it will only be enforced for tax periods that conclude on or before 31 December 2026.
What is the Interest Deduction Limitation and Tax Loss Relief Rule?
Tax losses incurred by a taxpayer that has not been utilized. Also disallowed net interest expenses can be carried forward and claimed in future tax periods. However, this is subject to certain conditions. The taxpayer can only claim these losses in tax periods where they do not elect for Small Business Relief. This means that if the taxpayer chooses to claim Small Business Relief, they cannot utilize their tax losses . And also disallow net interest expenses in that particular tax period. Taxpayers need to consider this when making their tax planning decisions to ensure that they maximize their tax benefits. While complying with the tax regulations.
What Does the Decision Say About the General Anti-Abuse Rule?
Taxable persons eligible for Small Business Relief in the UAE should be aware of the General Anti-Avoidance Rule (GAAR) mentioned in the CT Law. According to this rule, if a taxable person intentionally separates their business to meet the AED 3,000,000 threshold. Also evades being subject to UAE CT, the Federal Tax Authority reserves the right to adjust the UAE CT liability of the relevant taxable person accordingly.
UAE Corporate Tax: Essential Knowledge on Relief for Small Businesses
The Small Business Relief program benefits start-ups and small businesses by reducing their tax costs and compliance requirements. It’s worth noting that if a group is considering creating a consolidated “Tax Group” under Article 40 of the CT Law, any group entities falling within the Small Business Relief program may miss out on potential savings and reduced administrative burdens. This is because their revenue is combined with the income of other group entities and subject to the Group’s effective tax rate.
How to Determine the Revenue for Small Business Relief?
To qualify for tax relief in the UAE, a resident individual subject to taxation must have a turnover of AED 3 million or less in the previous and current tax years. The revenue should be determined based on the accepted accounting standards in the country. It’s important to note that if revenue exceeds this limit in any tax period, the tax relief will no longer be applicable.
Faq’s:
Following are the Faqs:
Small Business Relief is a scheme that can significantly benefit small businesses operating in the UAE. It enables eligible Resident Taxable Persons, including natural and juridical entities, to choose an exemption from UAE Corporate Tax if their revenue meets the specific criteria.
Under the Small Business Relief program, businesses that meet the eligibility criteria can report their taxable income as zero for a specific tax period. Qualifying small businesses will not be liable to pay any corporate taxes during the eligible period.
The United Arab Emirates (UAE) government recently revealed that it will implement a corporate tax on June 1, 2023. According to the new regulations, any individual or business that meets the criteria for taxation will be required to pay a 9% corporate tax rate starting from their first financial year that begins on or after June 1, 2023.
According to the Corporate Tax Law, Small Business Relief is not granted automatically and must be claimed through an election. It is important to note that whether or not the relief is claimed, Taxable Persons must register for and file corporate tax returns.
The Small Business Relief in UAE allows taxable individuals with revenue below 3 million AED and meeting specific criteria to claim the relief by choosing not to surpass any taxable income during the relevant tax period.
Conclusion
In conclusion, Small Business Relief is a valuable tax break for small businesses in the UAE, reducing business costs and facilitating growth. The relief aims to support local businesses with lower annual Revenue, alleviating their costs to foster success. However, businesses should carefully assess the benefits of claiming relief each tax period based on taxable profits, interest costs, and available tax reliefs.
Seek Guidance from RFZ
For small businesses in the UAE seeking more information on Small Business Relief, contact RFZ today. We are ready to assist in understanding tax obligations and ensuring the utilization of available tax reliefs. Our team offers personalized accounting and auditing services to support your business. Reach out to explore our services further.
