UAE business landscapes are revolutionizing the way the corporate world works and play a part in the economy. Small Business Relief is a new tax regulation for corporate taxation that came into effect on June 1, 2023. The advanced regulatory framework considers the exemption of businesses from Corporate Tax payments under certain conditions that make it easy for businesses to pay taxes. 

Small businesses in the Middle East face unique challenges that make it crucial for the regulatory authority to consider them and adjust tax regulations. By reducing the tax burden, it allows companies to invest more in the growth and development and contribute to the economic development of a country. 

Eligibility Criteria for Small Business Tax Relief

For businesses to qualify for Small Business Tax Relief, it is important to meet the following eligibility criteria.

Limit of Revenue:

The annual revenue of a business must not exceed AED 3 million for the specified tax period. Moreover, it is important to ensure that the revenue should be below this limit for all previous tax periods that end on or before December 31, 2026. For instance, if it exceeds your business will not be eligible for tax relief. 

Resident Status

Relief is available to resident persons in the UAE, which includes:

• Natural and juridical persons incorporated within the UAE.
• Free zone persons meeting specific criteria.
• Juridical persons incorporated outside the UAE but controlled and managed from within the UAE.

Election for Relief

• Businesses can claim relief for multiple consecutive tax periods if they meet the eligibility criteria.
• A notification must be filed with the taxation authorities during the relevant tax period to secure eligibility.
• If the tax return is submitted without electing for the relief, it cannot be claimed retroactively.

Tax Registration Number (TRN)

To qualify for relief, businesses must:

• Register for Corporate Tax and obtain a TRN.
• Maintain comprehensive records, including revenue documentation, to substantiate their eligibility for relief.

Small Business Relief in the UAE: Key Benefits

Eligible resident taxable individuals, both natural and juridical, may choose to forego corporation tax under the UAE government’s Small Business Relief program, as long as their revenue satisfies certain requirements. This program is important for the following reasons:

Simplicity in administration

Strict administrative requirements, like maintaining copious books and filing corporate tax reports, are waived for qualified companies. They are allowed to employ cash-based accounting systems, which simplifies and cuts down on the time required for financial administration.

Simplified Compliance and Tax Exemption

Companies that meet the requirements for the relief are not required to pay corporation tax on their taxable income during the relevant tax period. Compared to other firms, compliance duties are much lower. For example, the regulatory burden is lessened by the simplification of transfer pricing regulations. The standards for overall reporting are intended to be simpler.

By providing administrative and financial flexibility, this program not only lessens the tax burden but also promotes the expansion of small enterprises.

Who Does Not Qualify for Small Business Assistance?

Not every company in the United Arab Emirates is eligible for Small Business Relief. The following are not eligible to apply:

Members of an MNE Group Companies that operate in many countries and are members of an MNE group with a combined group revenue of more than AED 3.15 billion are not eligible for this rebate. These companies also have to follow UAE laws, which include preparing and submitting a Country-by-Country Report (CbCR) in accordance with the relevant laws. By excluding bigger international firms, tiny Business Relief is certain to target truly tiny businesses.

Any MNE member firm that makes contributions to the group’s consolidated financials is subject to this requirement. Unless the business has been excluded from the consolidated financial reporting due to its lack of significance, its size is irrelevant. An MNE’s member entities in the UAE receive particular attention. Even if their individual revenues fall below the AED 3 million level, they are still ineligible for Small Business Tax Relief. 

Persons in the Qualifying Free Zone (QFZP)

Since you currently get 0% corporation tax on your qualifying income, your company is not eligible for the Small Business Tax Relief if it is a QFZP.

A Qualified Free Zone Person (QFZP) is a company if:

• It generates a certain amount of qualifying revenue and operates extensively in the United Arab Emirates.
• It complies with established transfer pricing guidelines and the Arm’s Length Principle.
• Additional requirements for free zone entities include revenue constraints, which state that non-qualifying income cannot exceed AED 5 million or 5% of total revenue.
• The de minimis standards are not exceeded by its non-qualifying income.
• Additionally, a QFZP is required to compile audited financial accounts.

Artificial Business Division

In order to stay below the AED 3 million revenue barrier, UAE firms that purposefully engage in corporate restructuring and divide their activities into many sections are not eligible for Small Business Tax Relief.

The entity is required to pay the unpaid corporation tax and any associated penalties if the Federal Tax Authority (FTA) finds that the split was made in order to avoid paying taxes. 

The UAE’s Small Business Relief Mechanism

As long as their revenue is below the designated threshold, qualified resident persons may be considered as having no taxable income for the applicable tax period under the UAE’s Small Business Relief program.

These companies are therefore free from corporation tax obligations on revenue received throughout the relevant time frame. The amount of relief that is provided is determined by the business’s profitability, guaranteeing that smaller businesses with lower incomes gain the most.

Effects on Additional Corporate Tax Laws

Certain additional corporation tax regulations are not applicable to businesses who choose to apply for Small Business Relief in the United Arab Emirates. In particular:

• Tax Loss Rules: During the applicable tax period, certain enterprises are not permitted to use or carry forward tax losses.
• They are also prohibited from using the General Interest Deduction Limitation Rule to claim interest cost deductions.
• The foundation for applying these reliefs, which rely on taxable income computations, is eliminated when Small Business Relief declares qualified enterprises to have no taxable income. This leads to these exclusions.