How Small Businesses Can Leverage Relief Measures in UAE Corporate Tax
In the rapidly growing environment of the UAE, small businesses contribute significantly towards the growth and diversity of the economy. Owing to their contribution, the UAE Ministry of Finance (MOF) has introduced comprehensive updates to the Small Business Relief Scheme. This scheme intends to provide certain reliefs to small businesses operating in the UAE. These reliefs give them the freedom to conduct their business activities freely without taking corporate tax registration into consideration. Small corporations are the ones whose annual revenue does not exceed AED 3 million per year. In this blog, we’ll explore the relief provided to small corporations in detail.
What is Small Business Relief?
Small business relief is a relaxation which is offered to small businesses in respect to the obligation to pay the corporate taxes in UAE. Such relief lessens the requirements which small corporations have to adhere to while paying the corporate taxes. For a certain tax period, qualifying businesses can treat their taxable income as zero due to Small Business Relief. During the qualifying period, qualifying small businesses won't be required to pay any amount for corporate tax registration. This initiative by the UAE Ministry of Finance aims at providing financial assistance, support, or relief to small businesses facing challenges or crises. Small corporations generally face many crises during their initial stages. Thus, such relief programs help them to survive in the competitive market.
Eligibility Criteria for Small Business Relief
The Taxable Person's total revenue determines their eligibility for Small Business Relief, regardless of the number of businesses or activities they conduct. The following requirements must be fulfilled, as per the Ministerial Decision:
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The taxable entity needs to be a UAE resident in order to be eligible.
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The combined revenue for the current and previous tax periods should not surpass AED 3 million per period.
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The period of application for this revenue threshold is June 1, 2023, through December 31, 2026.
Who is not eligible for Small Business Relief?
Small business relief is not available to UAE residents with yearly revenue of more than AED 3 million. There are, nevertheless, two significant exceptions to this standard:
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In cases where the company belongs to a multinational enterprise group (MNE);
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When the company is a Qualifying Free Zone Individual.
Members of an Multinational Enterprises (MNE)
A business that is a component company of a multinational enterprise will not be eligible for Small Business Relief. Under the UAE's Country-by-Country Reporting legislation, multinational enterprises (MNEs) are groups of companies that operate in multiple countries and have a total consolidated group revenue of more than AED 3.15 billion. MNEs are also required to prepare a Country-by-Country Report. For the purpose of preparing financial reports, a constituent company is defined as:
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The MNE includes any independent business unit in its consolidated financial statements.
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The MNE excludes any business unit from its consolidated financial statements due to reasons of size or materiality.
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If the business unit of the MNE prepares separate financial statements for the PE, then any PE of that business unit would be eligible.
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A UAE constituent company of an MNE will not be eligible to elect for Small Business Relief even if its revenue for the relevant Tax Period and all prior Tax Periods was equal to or less than AED 3,000,000.
Qualifying Free Zone Persons
Qualifying Free Zone Persons will not be eligible for Small Business Relief. Individuals who are eligible for a free zone already enjoy the benefit of 0% corporate taxes in the UAE on their qualifying income. A Free Zone Person who satisfies the following criteria is considered qualified:
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Maintains sufficient substance in the United Arab Emirates
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Derives Qualifying Income as defined by the applicable Cabinet Decision
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Has not chosen to be subject to Corporate Tax
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Adheres to the Arm's Length Principle and transfer pricing documentation requirements
Election and Implications
If a Free Zone entity meets the requirements of the Small Business Relief program, they may still apply for Small Business Relief even if they originally chose the standard scheme with a corporate income tax (CIT) rate of 9%. Selecting the standard scheme gives the Free Zone entity Qualifying free zone person status and disqualifies them from the Free Zone Exemption.
Tax Loss Relief and Interest Deduction Limitation Rule
Only in tax periods when Small Business Relief is not elected may any tax losses and disallowed Net Interest Expenditure be carried forward to a later tax period. Companies applying for Small Business Relief must understand the requirements regarding net interest expenditure and tax losses. These companies are not permitted to carry forward any net interest expenses or tax losses from the relief period to subsequent tax years. These sums are only transferable to times when the Small Business Relief isn't in operation.
Relief and Tax Exemption
A Taxable Entity will not be required to pay any taxes during the applicable tax period after meeting the requirements and choosing to participate in the Scheme. Companies still have to comply with the Tax Procedures Law's requirements for keeping financial records and meeting obligations, even with this relief.
Corporate Tax Registration
Participation in the Scheme does not automatically enroll a person. In order to be eligible for the scheme, taxable entities must meet all requirements and choose to participate voluntarily. Whether or not a company meets the requirements for Small Business Relief, it still needs to register for corporate tax.
Conclusion
You might qualify for small business relief if your company is based in the UAE, was incorporated there, or if you are an individual running a business there, as long as your revenue for the applicable tax period does not surpass AED 3 million. Such exemption provides relief to these businesses. Experts from Dhanguard will assist you to get authentic and complete information regarding the complexities involved and relaxations given to small businesses. Contact us today to learn about the reliefs given to small businesses in the UAE.
