Introduction to Small Business Relief under UAE Corporate Tax
Article 21 of the UAE Corporate Tax Law provided that small businesses below a particular revenue would be exempt from UAE Corporate Tax. Vide Ministerial Decision No. 73 of 2023 on Small Business Relief for the Purposes of Federal Decree-Law No. 47 of 2022, the UAE has released the provision of exemption from UAE Corporate tax on small businesses. In order to understand Small business relief, we should first refer to Article 21 of the UAE Corporate Tax Law , which reads as under : – ”
- A Taxable Person that is a Resident Person may elect to be treated as not having derived any Taxable Income for a Tax Period where:
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- the Revenue of the Taxable Person for the relevant Tax Period and previous Tax Periods does not exceed a threshold to be set by the Minister; and
- the Taxable Person meets all other conditions prescribed by the Minister.
2. Where Clause 1 of this Article applies to a Taxable Person, the following provisions of this Decree-Law shall not apply:
- Exempt Income as specified in Chapter Seven of this Decree-Law.
- Reliefs as specified in Chapter Eight of this Decree-Law.
- Deductions as specified in Chapter Nine of this Decree-Law.
- Tax Loss relief as specified in Chapter Eleven of this Decree-Law.
- Article 55 of this Decree-Law.
3. The Authority may take the necessary measures to verify the compliance with the conditions of Clause 1 of this Article, and may request any relevant information or records from the Taxable Person within the timeline prescribed by the Authority.”
However, the following details were not available in respect of Article 21 : –
- Revenue threshold below which a Taxable Person would be exempt ;
- Conditions to be met by Taxable Person
Ministerial Decision No. 73 of 2023 on Small Business Relief for the Purposes of Federal Decree-Law No. 47 of 2022 has answered some of these questions. Lets look at them : –
Revenue Threshold Limit for Small Business Relief – Article 2
Businesses, with revenue below AED 3 million for the relevant and previous Tax Periods will be exempt from UAE Corporate Tax and such revenue will be computed as per accounting standards in the UAE.
Applicability of Threshold Limit
The small business relief will be available to taxpayers for the following tax period: –
- First Year for Relief – Tax Periods starting on or after June 1, 2023
- Last Year for Relief – Tax Periods ending on or before December 31, 2026
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Non-Applicability of Small Business Relief – Article 3
The small business relief, would not be available to UAE tax residents, who are covered within the following cases: –
- When such person is a Qualifying Free Zone Person; or,
- Constituent Company of a Multinational Enterprises Group, which is covered under Country by Country reporting
Whether carry forward of Tax Losses would be allowed to entities claiming Small Business Relief? – Article 4
Tax Losses incurred in the Tax Period where a business claims small business relief cannot be carried forward. However, the unutilized Tax Losses incurred in the previous Tax Period where an election for relief was not made, can be carried forward to the Tax Period, where small business relief is not claimed.
General Interest Deduction Limitation Rule – Article 5
In case a taxpayer opts for the small business relief, it will become ineligible to carry forward its Net Interest Expenditure to the subsequent Tax Period. However, Net Interest Expenditure in the previous Tax Period where an election for relief was not made, can be carried forward to the Tax Period, when small business relief is not claimed (subject to Article 30 of the UAE CT Law).
Can I claim Small Business Relief by Artificial Separation of Business? – Article 6
If the FTA establishes that the person has artificially separated their business, to claim small business relief when actually the revenue across the businesses is more than the threshold prescribed for small business relief, the person will be treated as obtaining a Corporate Tax Advantage under Article 50(1) of the UAE Corporate Tax Law (Anti-Abuse Provision)
In order to determine if the business is artificially separated, FTA will look into the following aspects:
- Whether the arrangement entered into, was for a valid commercial purpose?
- Whether the person undertook substantially similar business as per the facts and circumstances?
- The financial, organizational, economic links, etc. of the person or business?
Publication and Application of the Decision – Article 7
The decision shall be enforced within 15 days from the date of the publication.
Conclusion
In conclusion, the UAE MOF has now prescribed the threshold for election to be made for small business relief. Consequently, this will help businesses to identify if they are eligible to apply for the same. Therefore, if the threshold limit is breached, the Taxable Person will not be able to apply for Small Business Relief.
Learn more about the concept of Small Business Relief in our article on “Calculation of Taxable Income“.
