Individuals running one-man operations or in the ecommerce space should give serious thought about upgrading their business profile to be an SME. Image Credit: Vijith Pulikkal/Gulf News

Dubai: Individual-operated businesses – especially those in the ecommerce/tech space – should consider upgrading their licenses to that of a small business, given the various provisions in the UAE Corporate Tax.

In a recent update, the Ministry of Finance said that the corporate tax would apply to individuals generating a turnover of more than Dh1 million a year. (This however excludes rental income or that generated from capital gains or dividends.)

“There may be many individual-owned businesses or freelancers/influencers who would be booking more than Dh1 million as their annual revenue or sales,” said a consultant. “And they will then come under the tax net.”

But if they were to upgrade their operations into a small business framework, then there is more room to maneuver in. Because for SMEs, the revenue threshold is Dh3 million.

“For corporate tax purposes, upgrading to an SME status makes more sense,” said the tax consultant. “In fact, this is an active incentive offered by the government authorities to encourage business activity by providing extended relief for small businesses.”

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The ‘relief’

This is where the earlier announced ‘Small Business Relief’ package will come in. Those generating revenues under Dh3 million during the taxable period come under the relief coverage.

These entities will be eligible for tax relief for a three-year period.

“The Small Business Relief option has been designed to ease these businesses entry into the corporate tax net,” said the consultant. “The extra three years under the program is the biggest selling point.

“Freelance entities or those ‘natural persons’ booking revenues of more than Dh1 million need to have a look at the pros and cons of getting licensed as a full-fledged commercial entity.

“And provided they are well clear of the Ministry of Finance or FTA’s (Federal Tax Authority) anti-abuse rules.”

What makes up the small business relief
Small businesses in the UAE can benefit for tax periods starting on or after June 1. And they can ap­ply for subsequent tax periods that end before or on December 31, 2026.

But be warned - business should not be seen as breaking the 'anti-abuse rules' to make use of the relief.

Tax status of 'natural persons'

This is what the Ministry of Finance has to say about UAE residents generating revenues from any activity. If the combined turnover from this endeavour exceeds Dh1 million, the individual would be subject to corporate tax.

"It's a fairly straight-forward benefit for these residents to switch to a licensed corporate entity," said an auditor. "But we will need to see how the authorities and those overseeing the tax regime will look at such switches. Some precedents might need to be set before the benefit-risk equation can be solved.

"For now, it sure does look like a major positive step individual-run businesses can consider."