UAE corporate tax – small business relief

The Ministerial Decision will come into effect on 1 June 2023. The Ministerial Decision adds further clarity to the provisions of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (Corporate Tax Law), which is also due to come into effect on 1 June 2023.

To encourage investment, and to help small businesses and start-ups, Article 21 of the Corporate Tax Law provides for a small business relief mechanism. Under this mechanism, a qualified resident person may elect to be treated as having no taxable income for a particular tax period.

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A Resident Person is any of the following:

• a juridical person that is incorporated or otherwise established in, or recognised under, the applicable legislation of the UAE, including a free zone;
• a juridical person that is incorporated or otherwise established in, or recognised under the applicable legislation of, a foreign jurisdiction but managed and controlled in the UAE;
• a natural person who carries out business activities in the UAE; or
• any other person as may be determined by a decision of the cabinet or finance minister.

In addition to the above, to be considered for small business relief, businesses should also have regard to the following:

Eligibility and threshold

• The Ministerial Decision establishes that businesses and individuals that generate an annual revenue below AED3 million will qualify for the small business relief exemption.  The relief will be available for financial years beginning on or after 1 June 2023 until 31 December 2026. This applies if their revenue in the relevant tax period and previous tax periods is below AED3 million for each such tax period. Once the revenue threshold is exceeded, the small business relief will no longer be available.
• Businesses that are eligible for relief but do not elect to apply for it will have the option to carry forward incurred tax losses and can disallow net interest expenditure from such tax periods. The Ministerial Decision expands on the relief already contained in the Corporate Tax Law, which applies to businesses with annual profits of less than AED375,000. Where this relief is applied, there is also no ability to carry forward losses.

Businesses precluded

Small business relief is solely available to UAE entities who are a Resident Person and are not one of the following:

• a constituent company of a multinational enterprises group (groups of companies with operations in more than one country with a consolidated revenue exceeding AED3.15 billion); and
• a qualifying free zone person, (i.e. a legal person incorporated, established, or otherwise registered in a free zone).

Anti-Abuse rules

Where a taxable person who has artificially separated their business, or business activity and the total revenue exceeds AED3 million in any tax period, and such person has elected to apply for small business relief, this would be considered an arrangement to obtain a corporate tax advantage under Clause (1) of Article 50 regarding the general anti-abuse rules of the Corporate Tax Law and may be set aside.

Burden is on the business

Regardless of whether the relief is claimed, small business entities may be under an obligation to register for and file corporate tax returns.  However, there may be a relaxation of filing and registration requirements for small businesses under rules that are still awaited.

Conclusion

There are additional regulations to be released to expand on many key provisions relating to small business relief within the Corporate Tax Law. As such, the above is not exhaustive.