Understanding Small Business Tax Relief in the UAE

The UAE’s Federal Tax Authority (FTA) has released a tax guide focused on small business relief. In this article, we will break down the essential points to assist small businesses in grasping the nuances of the relief. This will aid in making informed decisions on when to opt for it, facilitating a more favorable tax stance during the initial phases of the corporate income tax implementation in the UAE.

Definition of Small Business Relief

Small Business Relief is designed to support small businesses in the UAE by reducing their compliance obligations regarding the new Corporate Tax regime. Essentially, businesses with a revenue equal to or less than AED 3,000,000 in a relevant tax period until December 31, 2026, can opt for this relief, thereby not being required to calculate their taxable income or pay corporate tax for that period.

Revenue Threshold Calculation

To determine the revenue threshold for this relief, here are the key points to consider:

• Inclusive Income: Incorporate both gross income from business activities and other incomes, such as from selling business assets.
• Foreign and Domestic Income: Businesses should include all foreign and UAE incomes, while natural persons should focus on foreign income related to their business activity in the UAE, alongside their domestic income.
• Accounting Standards: Adhere to UAE accepted accounting standards (IFRS or IFRS for SMEs) or cash basis accounting for businesses with revenue up to AED 3 million.

Opting for Small Business Relief

The relief is optional and must be elected within the Tax Return of the relevant tax period. It is pivotal to make an informed decision as once the tax return is submitted without electing for this relief, revisiting this option is not permissible.

Exclusions from Small Business Relief

Certain entities are not eligible for this benefit:

• Those exceeding the AED 3,000,000 revenue threshold in any tax period.
• Members of a Multinational Enterprise Group (MNE).
• Qualifying Free Zone Persons (subject to 0% corporate tax)
• Businesses that split their activities artificially to meet the revenue threshold.

Artificial Separation and Its Repercussions

The Small Business Relief initiative does not extend its benefits to individuals who deliberately fragment their business into multiple entities to keep the revenue of each below the requisite threshold for Small Business Relief qualification. In instances where the FTA identifies such strategic bifurcation, the involved party will be mandated to settle any outstanding corporate income tax along with applicable fines.

Compliance Obligations

Businesses electing for this relief must adhere to specific compliance obligations including:

• Self-Assessment and Registration: Register for corporate tax and elect for the relief through tax return filing, a procedure to be repeated each taxable period.
• Tax Return Filing: file a simplified tax return through Emaratax portal.
• Recordkeeping: Maintain accurate records for seven years to demonstrate the revenue did not surpass the threshold.

Effect on VAT Registered Businesses in the UAE

This relief pertains exclusively to corporate tax, hence does not alter VAT compliance requirements, which remain unchanged.

Impact on Other Corporate Income Tax Rules

Opting for Small Business Relief comes with specific exclusions in terms of other corporate tax reliefs and rules, which are outlined below:

Tax Losses

• Accrual: Businesses cannot accrue, utilize, or transfer tax losses for the tax period in which Small Business Relief is elected.
• Carry Forward: Tax losses that remain unutilized from previous tax periods, where Small Business Relief was not chosen, can be carried forward to offset future taxable income in periods without Small Business Relief election.

Exempt Income

• Inclusive Calculation: For the purposes of Small Business Relief, all income, including the exempt income, needs to be accounted for in the revenue threshold calculation.

Business Restructuring Relief

• Inaccessibility: This kind of relief remains inaccessible for businesses in the periods they elect for Small Business Relief.

Corporate Tax Groups

Tax groups can opt for this relief if their collective revenue is equal to or below the stipulated threshold, applying to the entire group rather than individual members.

Conclusion

Before choosing to take advantage of this relief, companies should carefully consider different elements such as tax losses and opportunities for business restructuring relief. By judiciously deciding when to opt for the relief, businesses can maximize their savings and operate more efficiently.