The Ministry of Finance has taken a significant step towards supporting small businesses in the UAE with Ministerial Decision No. 73 of 2023 on Small Business Relief for Corporate Tax.
Small Business Relief aims to ease the burden on startups, small, and micro-enterprises by reducing their Corporate Tax and compliance costs. The decision outlines the revenue threshold and conditions for eligible businesses to avail the relief and also clarifies provisions related to carried forward Tax Losses and disallowed Net Interest Expenditure under this scheme.
Here’s what you need to know about Small Business Relief:
Eligibility and Revenue Thresholds
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.
Effective Period
The AED 3 million revenue threshold will apply to tax periods starting from 1st June 2023 and will continue until tax periods ending on or before 31st December 2026. In addition to meeting the above-mentioned threshold, other conditions must be fulfilled in order to be eligible for small business relief.
Exclusions
Small Business Relief won’t be available for Qualifying Free Zone Persons or members of Multinational Enterprises Groups (MNE Groups) with consolidated group revenues exceeding AED 3.15 billion.
Tax Losses and Net Interest Expenditure: Businesses not opting for Small Business Relief in specific tax periods can carry forward any incurred Tax Losses and disallowed Net Interest Expenditure for use in future tax periods without the relief.
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
The decision warns against artificial separation of business activities to claim Small Business Relief while exceeding the revenue threshold. Such arrangements may fall under the general anti-abuse rules of the Corporate Tax Law. 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
If your business is a mainland business or incorporated in the UAE or if you are a person that operates a business in the UAE, you may be eligible for small business relief, provided that your revenue in the relevant tax period does not exceed AED 3 million.
As UAE’s corporate tax regime are still new, we look forward to seeing additional decisions clarifying the provisions of the Corporate Tax Law, such as those relating to qualifying income.
If you have any questions regarding the UAE corporate tax regime or its application to your business, please get in touch with your usual Reed Smith contact or one of the authors. We would be happy to assist you in determining whether corporate tax will apply to your business and what the next steps are to ensuring compliance.
Supporting the growth of small businesses is crucial for the UAE’s economy, and the Small Business Relief paves the way for a promising future for these enterprises.
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