How Small Businesses Can Obtain Corporate Tax Relief in the UAE?

Small Business Relief – An Overview

As an initiative to ease the corporate tax burden for businesses in the UAE, the government has implemented a Small Business Relief scheme. Naturally, you must be wondering what entities are covered under this provision and what is the eligibility criteria for obtaining tax relief. And that’s exactly what we will explore through this blog. As a general rule, corporate tax in the UAE will be applicable at a rate of 9% on taxable net profits over AED 375,000. However, entities that satisfy specific criteria can opt for relief from this 9% tax. Let’s explore what these criteria are in the upcoming section.

Who Can Obtain Tax Relief?

The Small Business Relief scheme is applicable for entities considered resident for corporate tax purposes in the UAE. These are referred to as resident taxable persons. As an example, an LLC company that is incorporated in the UAE and subject to the UAE’s corporate tax law can be considered as a resident taxable person. Also, a company incorporated outside the UAE can be considered a resident if it is effectively managed and controlled in the UAE and is subject to the UAE’s corporate tax law. 

Let’s consider an example of a non-resident entity. XYZ Ltd is a company that is incorporated abroad, and has an office operating in the UAE only for catering to its UAE-based clients. Such a company will be considered as non-resident irrespective of the revenue it derives. This applies to both mainland and free zone companies. 

Additionally, natural persons (individuals) are considered resident taxable persons if they are conducting taxable business with an annual turnover above AED 1,000,000 within the relevant Gregorian calendar year. The key eligibility criteria for these entities is that the generated revenue must be equal to or under AED 3,000,000 (in the relevant tax period and all the previous tax periods). 

An entity considered as ‘Qualifying Free Zone Person’, i.e. a free zone company eligible for 0% corporate tax, cannot apply for tax relief. Moreover, businesses that are a part of a Multinational Enterprise Group (MNE) will not be considered as eligible. It is important to note that an artificial separation of business into multiple entities will not be considered for tax relief and can instead incur penalties from the FTA.

How Does Small Business Relief Apply?

Now that we have clarified the eligible entities for Small Business Relief, let’s deep dive into the applicability of this scheme.

As per the scheme, eligible resident entities with a revenue equal to or under AED 3,000,000 for a tax period will be considered as if they have no taxable income for that period. This means that an eligible entity can have taxable profits over AED 375,000 but still pay no corporate tax if applied for this scheme.

It is however key to note that the entity must have a revenue equal to or under AED 3,000,000 for all the previous tax periods. 

Additionally, this scheme is applicable for tax periods that begin on or after 1 June 2023, and end before or on December 31, 2026. Let’s consider an example. ABC LLC is a resident company in the UAE. The company generated a revenue of AED 1,500,000 during the current tax period. In the previous tax period, the company derived a revenue of AED 4,500,000. As we can see the company’s revenue in the previous tax period exceeded the threshold of AED 3,000,000 and hence it will not be eligible for tax relief even though its revenue during the current tax period was well within the threshold. 

As we can see, revenue plays a key role in determining the eligibility for tax relief. As such, it is necessary to follow a specific accounting standard for determining the revenue. The FTA specifies the International Financial Reporting Standards (IFRS) as the applicable standard. However, entities deriving a revenue equal to or below AED 3,000,000 can adopt the cash basis of accounting for financial statement preparation. 

Corporate Tax Obligations for Eligible Taxable Persons

Even though an entity may be eligible for tax relief, it is necessary for it to fulfill certain obligations. These obligations include corporate tax registration and filing of returns. It can elect for relief through the filing of a tax return. Additionally, it must maintain financial records to back the information given through a tax return or in any other way to the FTA. 

For a business to fulfill the aforementioned obligations, it is necessary to maintain tax compliant books of accounts in UAE as per Ministerial Decision No. 114 of 2023. 

InZone is an accounting and tax service provider based in Dubai, UAE, and offers you all the assistance you need to obtain corporate tax relief yet comply with the necessary obligations.