Know Everything About Small Business Relief Under Corporate Tax In UAE

Understanding the crucial role that small businesses play in the economy, the UAE Ministry of Finance included 'Small Business Relief' in the new tax regime for corporation taxation when it came into effect on June 1, 2023. This new ministerial decision offers businesses exemption from CT payment under certain conditions. 

It is a strategic initiative that recognizes the unique challenges faced by small businesses in the entire Middle East. By reducing the tax burden, it allows companies to invest more in their growth and development, contributing to the country's economic development. 

Your company must meet certain criteria to be eligible for this relief. In this blog, we cover everything about ‘Small Business Tax Relief.’ Read on!

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What is Small Business Relief Under UAE Corporate Tax?

Small Business Relief is a provision in Article 21 of the Federal Decree-Law No. 47 of 2022. This relief ensures that eligible small businesses are exempt from paying corporate taxes during the applicable period. If your business is a UAE resident with revenues less than AED 3 million in a tax period and meets other conditions, then you are eligible for this benefit.

This does not mean that you will not be filing tax returns, rather it does take away the efforts of calculating Taxable Income, you can use the cash basis of accounting to manage your financial statements. Here is a brief overview of Small Business Tax relief: 

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What are the eligibility criteria for Small Business Tax Relief?

To qualify for Small Business Tax Relief, your business must meet these eligibility criteria - 

• Revenue Limit: Your business's annual revenue should not exceed AED 3 million for the tax period. It must also be below this limit for all previous tax periods ending on or before December 31, 2026. For example, if your business income is above AED 3 million for one year and below AED 3 million for the next year, you cannot apply for this relief.
• Resident Status: The relief is available to resident persons in the UAE, including natural and juridical persons incorporated in the UAE. This criteria also includes free zone persons and juridical persons incorporated outside the UAE but controlled and managed from the UAE.
• Election for Relief: You can claim this relief for multiple tax periods consecutively if your company meets the guidelines. However, you must file a notification with the taxation authorities during a specific tax period to be eligible. If the return is filed without opting for the relief, you cannot claim it later.
• Tax Registration Number (TRN): To be eligible for the relief, you must register for Corporate Tax and receive a TRN. You should also maintain records proving your eligibility, including revenue documentation.

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Who is not eligible for Small Business Relief?

As per the current rules, not all businesses are eligible for Small Business Tax Relief. You are not qualified to apply for ‘Small Business Tax Relief' if you fall under these categories: 

Members of a Multinational Enterprise Group (MNE)

If your business is part of an MNE group that operates across multiple countries and has a consolidated group revenue of over AED 3.15 billion, then you do not qualify for this relief. All MNEs are required to prepare a Country-by-Country Report as per the applicable legislation.

This rule applies to any constituent company within the MNE that contributes to the consolidated financials of the group. It does not matter how big or small the entity is unless it has been left out of the consolidated financial reports because it is not considered significant. Specific attention is given to UAE constituent entities of an MNE. Their eligibility for Small Business Tax Relief is negated even if the individual revenues are below the threshold of AED 3 million.

Qualifying Free Zone Persons (QFZP)

If your business is a QFZP, then it is excluded from the Small Business Tax Relief, as you are already benefiting from a 0% corporate tax on your qualifying income.

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

• It has substantial operations in the UAE and earns a specified qualifying income.
• It adheres to set transfer pricing rules and follows the Arm's Length Principle.
• Fulfill additional criteria specified for free zone entities include revenue limitations where non-qualifying income must not surpass 5% of total revenue or AED 5 million. 
• Its non-qualifying revenue does not exceed the de minimis requirements.

A QFZP must also prepare audited financial statements.

Artificial Separation of Businesses

UAE entities that intentionally undertake corporate restructuring and separate their operations into multiple units to remain below the AED 3 million revenue threshold are ineligible for Small Business Tax Relief. 

If the Federal Tax Authority (FTA) determines that such separation was done to evade taxes, the entity must pay the outstanding corporate tax along with applicable penalties.

How does Small Business Relief Work?

The key thing to understand about Small Business Relief is that the corporate tax relief it provides depends on taxable income and not on the revenue generated. This means that even if your business generates high revenue, you could still be eligible for Small Business Relief if your taxable profits are low.

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The above table shows the corporate tax your business can save by opting for Small Business Relief. Without this relief, your business would pay no corporate tax on the first AED 375,000 earned as profit; but you will be levied the corporate tax rate of 9% on any taxable income this limit. 

Will Small Business Relief have any implications on VAT registration?

Small Business Relief under the UAE corporate tax is a separate initiative, and it does not have any effect on compliance requirements for VAT or some other purpose.

If your business is registered for Value Added Tax (VAT), you must charge the applicable tax on the specified products or services. The VAT amount is not your income, as you are collecting it on behalf of the government. The collected amount must be transferred to the Federal Tax Authority (FTA) as per the prescribed timelines. Hence, you should not include the collected amount when calculating your revenue for corporate tax purposes. 

Impact of Small Business Relief on Other Corporate Tax Rules

If you are opting for the Small Business Relief, it is important to know which other corporate tax rules and benefits you can’t use. Here are the different parts of CT that do not apply to businesses using this relief:

• Tax Losses: Normally, businesses can carry forward their tax losses to offset future taxable income, reducing their tax liability. However, if you choose Small Business Relief, you cannot carry forward or offset tax losses since you are considered to have no taxable income.
• General Interest Deduction Limitation Rules: Under usual circumstances, the deductibility of interest expenses is capped to prevent excessive deductions. However, when your business benefits from Small Business Relief, these rules do not apply because you are not calculating taxable income. 
• Exempt Income: Income from certain business activities is exempt under the corporate tax rules. When you opt for Small Business Relief, it means that the entire business income is treated as non-taxable. This provision makes certain exemptions unnecessary. For example, investment income might typically be exempt, but under Small Business Relief, your total revenue is already considered non-taxable.
• Other Reliefs: There are several other corporate tax reliefs, like investments in certain assets, that aim to reduce your taxable income. Once you select Small Business Relief, these additional reliefs become inapplicable since your income is exempt from taxation.
• Deductions: The usual business deductions for expenses and costs are relevant when calculating taxable income. Under Small Business Relief, however, deductions like rent, salaries, or utilities do not apply because your business income is not subject to CT.
• Transfer Pricing Documentation: UAE companies are required to maintain documents proving that their transactions with related parties meet the arm's length principle. This requirement is waived for such businesses under Small Business Relief. 
• Tax Groups and Small Business Relief: In UAE, entities that are part of a tax group can consolidate their taxable income and losses. However, if you opt for the Small Business relief, your company cannot be a part of a tax group for corporate tax purposes.

Record-Keeping Requirements for Small Business Relief

Selecting Small Business Relief does not mean you don’t have to keep records. As per the corporate tax law, you are required to safely maintain the records of tax filings and other documents, including receipts, invoices, and order records, for at least seven years. These documents can be stored in digital format and need to be available for FTA when requested. This is important for any audits or inquiries, helping you stay compliant.

Digitalize your invoicing and receipt management with Alaan

To maximize the benefits of Small Business Relief, you must ensure seamless invoicing and receipt management. Alaan's corporate card and spend management solutions can optimize how your business handles financial documentation, eliminating the need for manual safekeeping and ensuring a hassle-free process.

• Automated Record-Keeping: Every transaction made using Alaan's corporate card is instantly recorded. This automation ensures that your business expenses are accurately logged without the need for manual entry. This aligns perfectly with the record-keeping requirements for Small Business Relief.
• Easy Receipt Management: Alaan offers a practical solution for transactions not made with the card. You can simply scan receipts using a mobile app, and these documents are securely stored within the system. This method not only simplifies storage but also aids in maintaining a digital record of your financial activities.
• Auto-Verification and Accessibility: Alaan's system auto-verifies all digital receipts, making them readily available for your finance team to review online. This feature facilitates a more efficient review process, saving valuable time and effort that can be redirected toward strategic financial planning.
• Insightful Spend Management: Alaan provides real-time financial insights, empowering your leadership and finance teams to monitor expenses closely. This visibility is crucial for making informed decisions, aiding in cost control, and ensuring compliance with Small Business Relief guidelines.

So why wait? Digitize your invoicing and receipt management with Alaan today and experience a hassle-free financial management process. Connect with us to learn more about how Alaan can help your business.