Understanding Small Business Relief under UAE Corporate Tax

The UAE started a new corporate tax relief system on June 1, 2023. This change affected how businesses operate.

Seeing the need to support small businesses, the UAE created ‘small business relief.’ This means some small businesses might not have to pay corporate tax. This change can help lessen their financial stress and help them grow in the UAE’s varied economy.

Understanding Small Business Relief

Small business relief is a program introduced by the UAE government, allowing eligible resident taxpayers, both individuals and legal entities, to opt for an exemption from UAE corporate tax if they meet specific revenue criteria. Here’s why this program is significant:

• Administrative Ease: Businesses that qualify for small business relief are exempt from stringent administrative requirements like filing detailed returns and maintaining complex bookkeeping records. They can use cash-based accounting systems, making financial management more straightforward and efficient.
• Tax Benefits: Qualifying businesses are exempt from paying corporate tax on their taxable income for the relevant tax period. Additionally, they benefit from relaxed compliance requirements compared to other businesses, with simplified regulations, including easier transfer pricing rules.

Identifying the Scope: Who It Affects in the UAE

One of the first steps to understand the UAE corporate tax is to know who it applies to. The rules say that a “resident person” can be any individual or company, including those in free zones, that do business in the UAE.

The tax period usually follows the financial year. This period is important for figuring out how much corporate tax a business owes. Companies need to look at what they do during this time to see if they have to pay the UAE corporate tax.

The UAE corporate tax applies to all resident persons, even those in free zones. It is important to understand the specific rules and how they affect different businesses to ensure they follow the law.

Who qualifies for small business relief?

Resident taxpayers in the UAE, both individuals and legal entities, can qualify for small business relief under the following conditions:

• Their income must not exceed AED 3 million in any given tax period or in all previous tax periods ending on or before 31 December 2026.
• They must choose to apply for the relief when filing their tax returns for the relevant tax period.
• They cannot be a financial institution or a holding company.

Eligible resident taxpayers include:

• Legal entities incorporated in the UAE, including those in free zones.
• Legal entities incorporated outside the UAE but whose control and management are based in the UAE.
• Individuals engaged in business or commercial activities within the UAE.
• Any person designated by the Cabinet under a specific decision.

Who is Ineligible for Small Business Relief?

Small Business Relief helps lower the tax burden for smaller businesses. However, some businesses do not qualify for this relief. These rules are there to stop any misuse of the relief and keep the tax system fair.

Knowing which businesses are ineligible helps prevent mistakes about qualifying for the relief. This way, businesses can plan their taxes correctly.

The following entities are not eligible for corporate tax exemptions under the UAE’s small business relief scheme:

• Multinational Enterprises (MNEs): Businesses that are part of a large MNE group with consolidated revenue exceeding AED 3.5 billion cannot opt for small business relief.
• Qualifying Free Zone Persons: Entities already benefiting from a 0% corporate tax rate in free zones are not eligible for additional exemptions under this scheme.

To maximize the benefits of the relief, businesses should carefully assess their eligibility and determine whether the relief aligns with their financial goals. It’s important to note that businesses cannot claim other tax benefits while claiming small business relief. Therefore, a thorough evaluation of all factors is recommended before applying.

The Impact on VAT and Other Tax Obligations

Small Business Relief can greatly affect a company’s corporate tax duties. It is important to know how it works with other tax systems, especially VAT, which runs separately in the UAE.

Even with Small Business Relief, businesses need to keep a clear line between their different tax duties. This helps them stay compliant with the rules in the UAE’s tax system.

Understanding the VAT Implications

Small Business Relief and VAT registration are separate. If your business qualifies for corporate tax, it doesn’t mean you do not have to follow VAT rules. If your business earns enough to meet the VAT registration limit, you must register.

Small Business Relief usually lets companies avoid being in a tax group for corporate tax. However, VAT rules may require a different choice. If a group’s total revenue goes over the VAT registration limit, each company in the group might need to register for VAT, even if they are below the limit.

Businesses in a tax group need to pay attention to this difference. Small Business Relief may keep them out of group corporate tax calculations. But for VAT, the total group revenue is what matters. This could mean that even smaller companies in a larger group may still need to register.

How Other Corporate Taxes Interact with Small Business Relief

Choosing to use Small Business Relief means that some corporate tax rules do not apply. This is mainly because these rules relate to taxable income, which is not important when you have this relief.

The rules about limiting interest deductions usually help manage interest costs linked to taxable income. But, these rules do not apply when you claim Small Business Relief. Since this relief means you do not need to calculate taxable income, those limits are not relevant.

Also, businesses that use this relief do not need to worry about carrying forward or using tax losses. This is because the relief makes their taxable income zero, so using tax losses is not needed.

In conclusion, it is very important to understand UAE Corporate Tax and the help available for small businesses. Knowing who qualifies, how it works, and its effect on VAT and other taxes can help small companies manage their tax duties better. Understanding what is excluded, clearing up any misunderstandings, and learning how to calculate benefits can help businesses make smart choices. Stay updated, ask for help when needed, and use the relief options to improve your tax situation. If you need more advice or help with your application, contact the right authorities or tax experts. Equip your small business with the knowledge it needs to succeed in the UAE’s tax landscape.

Also Read: Updated Guide: Corporate Tax FAQs in UAE 2024