Corporate Tax: Small Business Relief

The Ministry of Finance of the UAE has recently issued Ministerial Decision on Small Business Relief (“SBR”) for UAE Corporate Tax purposes. Such relief is intended to support and encourage the small and medium-sized enterprises (“SME”) sector, including start-ups in the UAE. 

If the annual revenue of an SME is less than AED 3 million (approximately USD 817,000), no corporate tax will be payable, irrespective of the actual profits. In addition to the 9 per cent tax relief on actual profits, SBR provides certain relief from tax compliance, such as exemption from the preparation and submission of transfer pricing documentation.

SBR can be availed of by legal entities and individuals who are tax residents in the UAE, irrespective of the ownership structure, number of employees, or type of business. However, the SBR will not apply to businesses that are eligible for a preferential free-zone tax regime or part of a multinational enterprise group with consolidated revenue exceeding AED 3.15 billion. No formal prior approval of FTA is required for SBR relief, and the annual tax return will have the option to elect for such relief.

SBR will be available for financial years starting on or after 1 June 2023 and will continue to apply to subsequent years that end before or on 31 December 2026. This essentially means that the relief will stay applicable for three tax years.

Being eligible for SBR does not mean that other requirements of corporate tax legislation will not apply to your business. You would still need to register for corporate tax and submit the annual corporate tax return. You should also maintain comprehensive accounts, and records and prepare financial statements. This will assist the Federal Tax Authority in evaluating the eligibility for SBR in any audit in the next 7 years.

Evaluation of benefits

While SBR may appear to have valuable tax advantages for your business, you should evaluate it before opting for tax relief. If your business is incurring a tax loss or is highly leveraged, resulting in a net interest expenditure of over 30 per cent, opting for SBR will restrict your ability to carry forward the tax loss and the excess interest expenditure. On the other hand, if you do not opt for SBR, you will need to undertake all tax compliances, which will include the preparation of transfer pricing documentation and benchmarking the salaries paid to owners/directors and their relatives at arm’s length.

Artificial separation of business

It should be noted that if business owners artificially separate their businesses into multiple entities to keep revenues below AED 3 million to claim benefits under SBR, it will be considered an arrangement to obtain a tax advantage under the general anti-abuse rules set out in the UAE corporate tax legislation, resulting in rejection of such relief by the UAE tax authorities along with penalties.