Understanding Small Business Relief: Key Provisions of the UAE Corporate Tax Law

Introduction:

The introduction of the Small Business Relief under Article 21 of the UAE Corporate Tax Law (Federal Decree-Law No. 47 of 2022) aims to support small businesses by exempting them from corporate tax obligations,provided they meet specific criteria. This relief is particularly significant as it allows small enterprises to flourish without the burden of taxation, promoting a more favourable environment for entrepreneurship and economic growth. 

Overview of Small Business Relief

Small Business Relief allows qualifying resident taxable persons to be treated as if they have not derived any taxable income for a tax period if their revenue does not exceed AED 3 million. This provision is particularly beneficial for small enterprises, enabling them to focus on growth and operational efficiency without the added pressure of corporate tax obligations.

Key Features of Small Business Relief

• • Revenue Threshold: The revenue threshold for Small Business Relief is set at AED 3 million for each tax period. This threshold applies to all tax periods ending before or on December 31, 2026.
  • Exemption from Corporate Tax: Eligible businesses are exempt from paying corporate tax during the applicable tax periods, allowing them to retain earnings that can be reinvested into their operations.
  • Simplified Accounting Requirements: Businesses opting for this relief can prepare their financial statements using the cash basis of accounting, simplifying their financial management and compliance processes.
  • Election Process: To claim Small Business Relief, businesses must elect this option by notifying the Federal Tax Authority (FTA) through their tax return for the respective period.

Eligibility Criteria: To qualify for Small Business Relief under Article 21, a business must meet specific criteria:

Revenue Limit: The total revenue must not exceed AED 3 million for the relevant tax period and all previous tax periods.

Business Type: The relief applies to various types of entities, including:

• • Juridical persons incorporated in the UAE.
  • Juridical persons incorporated outside the UAE but managed from within.
  • Natural persons conducting business activities in the UAE.

Impact on Other Corporate Tax Rules: While Small Business Relief provides significant benefits, it also comes with limitations:

Inapplicability of Other Tax Provisions: Businesses that elect for Small Business Relief cannot apply certain other corporate tax reliefs such as:

• • Tax loss carryforwards.
  • General interest deduction limitations.

Verification Measures: The FTA retains the right to verify compliance with eligibility criteria and may request relevant information from businesses claiming this relief.

General Anti-Abuse Rule (GAAR): Under Article 50 of the Corporate Tax Law, if businesses artificially separate their activities to qualify for Small Business Relief while exceeding the revenue threshold collectively, they may face adjustments to their corporate tax liabilities.

Ministerial Decision No. 73 of 2023 on Small Business Relief for the Purposes of Federal Decree-Law No. 47/2022 on the Taxation of Corporations and Businesses

Further clarifying the provisions of Small Business Relief, Ministerial Decision No. 73 of 2023 outlines specific conditions under which businesses can claim this exemption:

• • Revenue Calculation: Revenue must be determined according to applicable accounting standards accepted in the UAE.
  • Non-Eligibility for Certain Entities: The decision specifies that qualifying free zone persons and members of multinational enterprise groups are not eligible for Small Business Relief.
  • Verification Measures: The Federal Tax Authority (FTA) may request relevant records or information to verify compliance with the conditions set forth in both the Decree-Law and the Ministerial Decision.
  • Artificial Separation of Businesses: The FTA will scrutinize arrangements where businesses appear to have artificially separated their activities to qualify for Small Business Relief while exceeding revenue thresholds collectively.

Conclusion:

The Small Business Relief provision under the Federal Decree-Law No. 47/2022 is a strategic initiative designed to foster growth among small businesses in the UAE. By reducing their tax burden and simplifying compliance processes, this relief allows small enterprises to thrive in a competitive market environment. As businesses evaluate their eligibility and consider claiming this relief, they must carefully assess its implications on their overall financial strategies and compliance obligations.