How UAE businesses can claim Small Business Relief on corporate tax

Dubai: A UAE business generating Dh2.9 million in annual revenue and making Dh2.5 million in profit could still qualify for Small Business Relief, but it may miss the benefit if the option is not selected when filing its corporate tax return.

Mayank Sawhney, Managing Director of MaxGrowth Consulting and Board Member of Tax Experts Club UAE, said smaller companies may be unaware that the relief must be actively claimed, even when their revenue falls within the qualifying threshold.

He made the comments during the launch of the Tax Experts Club UAE in Dubai on Tuesday, where tax professionals discussed the planning options available to businesses under the UAE corporate tax regime.

“You have to opt for that relief while filing your corporate tax return,” Sawhney explained.

The relief was introduced to reduce the corporate tax burden on businesses with revenue of up to Dh3 million. Sawhney said the benefit can apply regardless of the company’s profits, provided all required conditions are met.

Small businesses may miss the option

A company handling its tax return internally could overlook the election if its accountant or business owner is unfamiliar with the filing requirements.

“Somebody has to tell you. Maybe as a small and medium scale business owner, you might not even be aware of that,” Sawhney said.

He gave the example of a consultancy generating Dh2.9 million in revenue with a limited cost base of Dh400,000. The company could record a profit of Dh2.5 million and still receive the relief if it meets the conditions and selects the option in its return.

Sawhney said businesses must also monitor revenue throughout the relief period because crossing the Dh3 million threshold in one year could affect their eligibility in later periods.

Companies approaching the limit should review their position before the end of the financial year and seek advice on whether their existing operating structure remains suitable.

Any changes to a business structure must have a commercial basis and should not be created solely to reduce the tax bill, he added.

Free-zone status does not guarantee zero tax

Sawhney also warned that setting up a company in a qualifying free zone does not automatically make it eligible for the zero per cent corporate tax rate.

The company must conduct qualifying activities and maintain sufficient economic substance in the free zone where it operates.

“Just having an entity in a qualifying free zone and doing the qualifying activities alone is not enough,” he said.

The requirements can include maintaining an appropriate number of employees, holding board meetings within the free zone and operating from office or warehouse space that reflects the size and nature of the business.

A free-zone company earning substantial revenue while using only a flexi-desk arrangement may struggle to demonstrate the required level of economic substance, particularly when its employees and operations are based elsewhere.

Sawhney noted that companies claiming the zero per cent rate without meeting the conditions could face tax assessments and penalties if selected for an audit.

Businesses must also monitor the share of revenue from non-qualifying activities, as exceeding the permitted limit can result in the loss of qualifying free-zone status for several years.

Tax groups may not suit every company

Companies operating several legal entities also need to consider whether forming a corporate tax group would reduce or increase their overall liability.

Each standalone taxable entity can benefit from the zero per cent rate on the first Dh375,000 of taxable income. Once several companies are placed into a single tax group, the threshold applies to the group as a whole.

Sawhney said that standalone registrations may therefore be more suitable when each entity is profitable and can use its own threshold.

A tax group could prove more beneficial when some entities are profitable and others are recording losses, since losses within the group can be set against profits.

It can also reduce certain transfer pricing documentation requirements for transactions between companies in the same tax group.

Businesses that do not form a tax group may still be able to transfer certain losses between commonly owned companies through the qualifying group relief provisions, subject to the ownership and filing requirements.

Tax planning needs a business purpose

Sawhney said corporate tax decisions should be reviewed regularly because a structure that worked during one period may become less suitable as revenue, costs and ownership arrangements change.

Companies can revisit earlier decisions involving tax groups or standalone entities when there are valid commercial reasons for doing so.

“The most important part is documentation,” he said.

Any restructuring or tax-planning measure should be supported by a legitimate business case, with records that explain the commercial reasons for the decision.

Arrangements created purely to obtain a tax advantage could fall within the UAE’s anti-abuse provisions, leaving the company exposed during a tax assessment or audit.