Small Business Relief Tax Framework in the UAE

Introduction to Small Business Relief in UAE:

Small Business Relief is a UAE government initiative that helps small businesses transition into the corporate tax system. It reduces compliance burdens by exempting eligible businesses from Corporate Tax calculations and payments while keeping them within the tax framework.

Eligibility Criteria for Small Business Relief:

Businesses with annual revenue of AED 3 million or less can elect for Small Business Relief for tax periods up to December 31, 2026. Both Natural and Juridical Resident Persons can apply, regardless of profitability. Eligibility is based solely on total revenue.

• If a business's revenue exceeds AED 3 million in any tax period, it loses eligibility permanently, even if revenue falls below the threshold in later periods.
• According to the Ministry of Finance, 82% of UAE businesses are micro-businesses with an annual turnover below AED 3 million.

How to Apply for Small Business Relief?

To qualify for Small Business Relief, a Taxable Person must first register for Corporate Tax. The relief can then be elected by submitting a Tax Return, with the election required for each Taxable Period.

Who is Not Eligible for Small Business Relief?

Regardless of revenue, the following businesses do not qualify:

• Businesses that are part of a Multinational Enterprise Group (MNE).
• Businesses that qualify as a Free Zone Person.
• Non-Resident Taxable Persons.

Avoiding Artificial Business Splitting:

Small Business Relief is unavailable to any business that artificially separates its activities into multiple entities to keep each entity’s revenue below the AED 3 million threshold. If the Federal Tax Authority (FTA) identifies such practices, the business must repay any unpaid Corporate Tax and may face penalties.

Record-Keeping Requirements:

Electing for Small Business Relief does not exempt businesses from record-keeping obligations. Under the Corporate Tax Law, businesses must retain their documents for at least seven years.

Key Implications of Electing for Small Business Relief in UAE:

1. Tax Losses:

• Businesses electing for Small Business Relief cannot accrue, utilize, or transfer tax losses for that period.
• Unused losses from prior periods can be carried forward when Small Business Relief is not elected, subject to conditions.

2. Interest Deduction Limitations:

• Net interest expenditure incurred during a Small Business Relief period cannot be carried forward. However, net interest expenditure from previous tax periods where relief was not applied may be carried forward, subject to conditions.

3. Other Tax Reliefs:

• Businesses cannot benefit from tax reliefs related to transfers within a qualifying group or business restructuring during periods when they elect for Small Business Relief.

4. Exempt Income and Revenue Calculations:

• Income types classified as Exempt Income (Article 22) are generally not taxable. However, when electing for Small Business Relief, all income is included in revenue calculations.

• Example:

XYZ LLC, a UAE Resident Person, has:

• • Sales Revenue: AED 2.5 million
  • Dividend Income: AED 1 million (tax-exempt)

- Since total revenue = AED 3.5 million (AED 2.5M + AED 1M), XYZ LLC exceeds the AED 3M threshold and is not eligible for Small Business Relief.

5. Transfer Pricing Compliance:

• Transfer pricing documentation requirements do not apply, but the FTA retains the right to review transactions and ensure compliance with the Arm’s Length Principle.

6. Tax Groups:

• A Tax Group can elect for Small Business Relief only if its total revenue does not exceed AED 3 million. The AED 3 million threshold applies to the entire group, not individual companies within it.

7. Accounting standards:

• Businesses opting for Small Business Relief may use the Cash Basis of Accounting to prepare their financial statements and calculate their Revenue to assess their eligibility for the relief. However, the FTA reserves the right to challenge this method if the results appear unreasonable.
• If a business is VAT-registered, the VAT charged should be excluded from the revenue threshold calculation.

8. First Tax Period - Longer or Shorter Than 12 Months:

• If the first Tax Period is longer or shorter than 12 months, the Revenue threshold for Small Business Relief is not pro-rated.

Final Thoughts:

Small Business Relief is a valuable tax incentive for micro and small businesses in the UAE, reducing their compliance burden and allowing them to focus on growth. Businesses should carefully assess their eligibility, maintain proper records, and understand tax implications before applying for relief. Non-compliance can lead to penalties and tax repayments.

Disclaimer

This document provides a high-level summary for general guidance only and it is not an official interpretation or a comprehensive analysis of UAE Tax Laws. You should not act upon the information contained in this publication without obtaining specific professional advice. Before taking any action, individuals and entities should seek expert advice based on their specific circumstances and rely on the official Cabinet and Ministerial Decisions, laws and guides issued by the UAE Ministry of Finance or the Federal Tax Authority (FTA). Mazeed and its affiliates assume no liability for any loss or damage arising from reliance on this document.