UAE Corporate Tax: Who should be applying for the new Small Business Relief?
Businesses carrying high debts will find this cuts their chances to carry forward tax loss
Since 2014, the UAE government has introduced a national program to develop, support and encourage the SME sector. The latest corporate tax relief - referred to as ‘Small Business Relief’ (SBR) - provides yet another support to the SME sector including start-ups.
If a taxable person’s revenue in a financial year (starting on or after June 1, 2023) does not exceed Dh3 million, no corporate tax would be payable irrespective of the actual profits. The Dh3 million threshold is fairly big and pragmatic as the SBR is not linked to the ownership structure, number of employees or the type of business.
Period and conditions for tax relief
The SBR will be available for financial years ending on or before December 31, 2026. Depending on the taxpayer’s financial year, SBR will be effectively for two to three years. If your financial year starts say, in April, the SBR applies to the period April 1, 2024 to March 31, 2025 and April 1, 2025 to March 31, 2026.
Further, if your revenue in a financial year exceeds Dh3 million, SBR would not be available for the remaining financial year(s) even if the revenues for such subsequent year(s) is less than the Dh3 million. SBR can be accessed by all such taxable persons, whether incorporated companies or individuals, who are ‘resident person’.
But not to persons who are eligible for any free zone tax relief or are part of a multinational enterprise group. It is worth noting that the tax relief is not a constant feature of the tax laws. New start-ups or SMEs launching in Q3/Q4 of 2026 or later would not be eligible unless any tax relief is extended in the future.
Tax laws still apply
Being eligible for SBR does not mean that the corporate tax law itself would not apply to your business. You would still need to register for corporate tax and submit the annual tax return. You should also maintain comprehensive accounts, records and documents.
This will assist the Federal Tax Authority in evaluating the eligibility for SBR in any audit in the next 7 years. A formal prior approval of FTA is not required for tax relief, and the annual tax return will have an option to elect for SBR.
In addition to the 9 per cent tax relief on actual profits, certain reliefs from tax compliance such as transfer pricing documentation would also be available to the small businesses.
To choose or not to choose?
At first sight, SBR may appear to have only tax advantages for your business. However, you should evaluate before opting for the 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 the 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. This will include domestic transfer pricing and benchmarking the salaries paid to owners/directors and their relatives at arm’s length.
Could the business be split into multiple entities?
To claim SBR, business owners might momentarily plan to split their business into multiple entities to keep revenues below Dh3 million. However, FTA could examine if one or more persons have artificially separated their business (into multiple entities) and the aggregate revenue of such entities is more than Dh3 million.
If found to be so, the tax relief would be denied by FTA under the anti-abuse rules along with penalties. Interestingly, the multiple entities could be owned by one person alone, his/her family members or even a third person.
The FTA will evaluate whether the persons are carrying on substantially the same business or business activity by considering various facts including financial, economic and organisational links.
Practical issues
Evaluating whether or not a business has been split into multiple entities under the anti-abuse rules could pose practical challenges. It is not yet clear if the evaluation would factor in the economic activity codes used by the local economic department and/or the location of business activity.
To illustrate, whether trading of ‘office’ furniture be treated as a separate activity from the trading of ‘home’ furniture? Or trading of furniture be treated as a separate activity from trading of motor vehicle? Will all such activities will come under a single umbrella of ‘trading’?
Could manufacturing activity be separated from onwards retail sale/trading by the same person(s)? Similarly, an audit firm could be providing accounting services to its clients. A corporate service provider could also be providing consulting services. In retail or the restaurant sector, a business owner may take up separate licenses for each location/shop.
Would such scenarios be treated as carrying on the same business activity? Or separate ones?
We have to wait for FTA’s guidance and evolution of the tax policy before business owners make any decision. The spirit of the small business tax relief is to support the start-ups and SMEs. Businesses should follow it in substance and in form.