The UAE government has implemented a new tax regime, effective from June 1, 2023. The new tax regime imposes taxes on the net profits of businesses, but it offers various reliefs to small businesses. One crucial relief available to small enterprises in the UAE is the small business relief. This relief enables qualifying businesses to be exempted from corporate tax liabilities, thereby providing significant financial relief.
The Impact of the Small Business Relief
Small Business Relief has emerged as a transformative measure for small enterprises within the Middle Eastern country. It allows eligible Resident Taxable Persons, whether individuals or corporate entities, to opt out of the Corporate Tax framework if their revenue meets specific criteria.
Businesses opting for this relief enjoy two primary advantages: Streamlined Administration and Tax Exemption. The first allows eligible entities to be relieved from the complexities of calculating Taxable Income, simplifying tax return filing processes and easing record-keeping burdens. Additionally, they can opt for the cash basis of accounting when preparing Financial Statements, facilitating more straightforward financial management practices. Instead, the latter exempts businesses from paying taxes on income earned during the Tax Period.
Additional Insights
The relief applies to tax years starting after June 1, 2023. A revenue threshold of Dh3 million is applicable to tax periods ending on or before December 31, 2026. Businesses can elect to claim Small Business Relief for specific tax periods by submitting notifications to the tax authorities. Eligible entities can claim the relief for multiple consecutive tax periods, provided they continue to meet the eligibility criteria.
Criteria for Eligibility
To qualify for Small Business Relief in the UAE, Taxable Persons must fulfil certain prerequisites.
Revenue must not exceed Dh3,000,000 for the relevant tax period and all preceding tax periods ending on or before December 31, 2026.
Furthermore, the election for Small Business Relief in the UAE must be included in the tax return for the respective tax period and finally, Small Business Relief in the UAE is accessible only to resident persons.
Exceptions to Small Business Relief
While Small Business Relief aims to support a broad spectrum of small businesses, certain exceptions exist: companies within an MNE (Multinational Enterprise Groups) with total consolidated group revenue exceeding Dh3.15 billion are ineligible for Small Business Relief and furthermore, entities qualifying for a 0% Corporate Tax rate on Qualifying Income within free zones (Qualifying Free Zone Persons) are ineligible for Small Business Relief.
Mechanism of Small Business Relief
Small Business Relief deems eligible Resident Persons as having no Taxable Income for the relevant Tax Period if their Revenue falls below the specified threshold. Consequently, these entities are exempted from tax liabilities on income earned during the said period. The extent of the relief availed by such businesses hinges on their profitability.
Other Implications
Businesses opting for Small Business Relief are precluded from applying certain other reliefs and regulations. Notably, they cannot utilize Tax Loss Rules or the General Interest Deduction Limitation Rule for the relevant Tax Period. This exclusion stems from the fact that these reliefs are contingent upon the calculation of Taxable Income, which Small Business Relief effectively nullifies for eligible entities.
Conditions for Small Business Relief
Businesses seeking eligibility for Small Business Relief in the UAE must meet the following stipulations: they must qualify as resident persons in the UAE; their revenue for the relevant tax period and preceding tax periods must not surpass Dh3 million and they must not operate as financial institutions or holding companies.
Conclusions
In conclusion, Small Business Relief emerges as a pivotal tax incentive for small enterprises operating in the country. By alleviating the tax burden, this relief mechanism aims to foster an environment conducive to the growth and prosperity of small businesses. While intended to support local enterprises with modest annual revenues, businesses must carefully assess the implications of claiming the relief in each tax period, considering factors such as taxable profits, interest costs, and available tax incentives.
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