Small and Medium Enterprises (SMEs) are often hailed as the pillars of a country’s economy, and this rings especially true for the United Arab Emirates (UAE). However, a concerning statistic reveals that around 50% of SMEs do not make it past their fifth year. Recognizing this challenge, the UAE’s latest Corporate Tax regime has been tailored to address the needs of these businesses, offering distinctive provisions to ensure SMEs not only survive but thrive within the country. On August 28, 2023, the UAE’s Federal Tax Authority (FTA) released an in-depth guide called “Small Business Relief – Corporate Tax Guide – CTGSBR1” (or “SBR Guide”). This guide, spread over eight sections, delves into the small business relief measures as detailed in the new Corporate Tax Law.
The core sections of the SBR Guide are:
- What is Small Business Relief?
- Eligibility conditions for Small Business Relief
- Impact of the Small Business Relief on other Corporate Tax Rules
- Compliance obligations, record keeping requirements and administration for Small Business Relief
- Artificial separation
This article provides an overview of the provisions within the UAE’s Corporate Tax legislation that offer facilitation to SMEs conducting business in the UAE from a tax perspective, as well as an overview of the SBR Guide issued by the FTA.
Type of SME
From a commercial perspective, SMEs in the UAE are generally registered either as a Sole Establishment or a form of a Limited Liability Company. For tax purposes, Sole Establishments are generally regarded as being one and the same person as the owner of the Sole Establishment.
For the purposes of this article, only sole establishments with an independent legal personality are discussed (i.e. only Sole Establishments in the form of a Limited Liability Company).
Requirement to Register for Corporate Tax in the UAE
As is the case with the majority of companies in the UAE, SMEs are typically required to register for the UAE’s Corporate Tax with the Federal Tax Authority (FTA). However, they can be exempt under Article 4 of the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (known as the “Corporate Tax Law”). Notably, there is no specific facilitation provided for in the Corporate Tax Law for SMEs in respect of the liability to register for Corporate Tax in the UAE.
Small Business Relief
The newly issued SBR Guide is based on the Small Business Relief, which is specific optional relief scheme introduced by the UAE’s legislator for SMEs exclusively. Under Article 21 of the Corporate Tax Law, read together with the Ministerial Decision No. 73 of 2023 on Small Business Relief for the Purposes of the Corporate Tax Law (“SBR MD”), resident taxable persons may elect to be treated as not having derived any taxable income for a tax period (hence the non-existence of an amount to be taxed under the UAE’s Corporate Tax regime) if their revenue does not exceed AED 3,000,000 in any tax period.
It is important to note that for the purposes of the Small Business Relief Scheme, the threshold specified is a threshold of ‘revenue’, unlike the threshold under Article 3(1)(a) of the Corporate Tax Law which is a ‘net profit’ threshold.
In addition to the above, for an SME to qualify for the Small Business Relief Scheme, it must meet all other conditions stipulated in Article 21(2) and 21(3) of the Corporate Tax Law, as well as those stipulated within the SBR MD.
To provide further information and detail, the FTA clarifies the Small Business Relief in its new SBR Guide, available in both Arabic and English on its official website.
What is covered in the SBR Guide
The SBR Guide starts by providing an overview of the Small Business Relief scheme, noting that the scheme is introduced to ease the implementation of the Corporate Tax regime for resident small businesses.
In Section 3 of the SBR Guide, the FTA explains the main benefits of electing to fall within the scope of the Small Business Relief, provides detail on the AED 3,000,000 revenue threshold, addresses exclusions where a business would not qualify for the Small Business Relief scheme, provides insights on how the Small Business Relief scheme works and applies, highlights the main results of opting for the Small Business Relief scheme, and prescribes the method to be followed by businesses in order to elect for Small Business Relief.
Section 4 of the SBR Guide discusses eligibility conditions and when they are considered met. Under Section 4 of the SBR Guide, the FTA states that the only eligibility requirement for the ability to elect for Small Business Relief is that the elector is a person that is a resident person for Corporate Tax purposes deriving revenue not exceeding AED 3,000,000 in the relevant tax periods. However, under the same section, the FTA further addresses timing restrictions, residency status, natural and juridical persons, and other factors, and while doing so, provides valuable illustrations and examples to resonate with the reader’s practical and individual circumstances, resulting in clear and straightforward delivery of the ideas behind the addressed concepts.
Section 5 of the SBR Guide is perhaps the most important section contained within the SBR Guide. Section 5 of the SBR Guide outlines the impact of the Small Business Relief scheme on other rules under the Corporate Tax regime, once again providing various scenario-based examples that help clarify the applicable rules. This includes impact in relation to the following:
- Tax losses
- General interest deduction limitation rules
- Exempt income
- Other reliefs
- Deductions
- Transfer pricing documentation
- Participation exemption
- Tax groups
Under Section 6 of the SBR Guide, the FTA addresses the administrative concerns and aspects in relation to the Small Business Relief scheme. The section discusses the requirement to self-assess, register, file tax returns, as well as retain records and the period for such retention.
Section 7 of the SBR Guide is a critical section that is concerned with businesses abusing the Small Business Relief scheme, whereas such businesses fragment their activities into separate parts for the purpose of including one or more of its activities under the Small Business Relief scheme. The FTA clarifies the dangers of such practice, noting that artificial separation is not acceptable for the purposes of the Small Business Relief scheme, and taxpayers will be required to repay the due Corporate Tax and possibly applicable administrative penalties. Interestingly, the FTA notes that not all types of separation are considered ‘artificial’, highlighting that it will undertake an ‘artificial separation test’ to determine whether or not a business is artificially separated. Section 7 provides further details on the concept of artificial separation, and provides various scenario-based examples in that regard.
Taxable Income Threshold – General SME Advantage
Corporate Tax in the UAE is generally applicable at rates of 9% and 0%. In accordance with Article 3(1)(a) of the Corporate Tax Law, read together with Cabinet Decision No. 116 of 2022 on the Determination of Annual Income Subject to Corporate Tax, SMEs can benefit from applying Corporate Tax at the rate of 0% for the portion of the taxable income not exceeding AED 375,000. Taxable income is generally regarded at the accounting net profit or loss (subject to adjustments and provisions prescribed within the Corporate Tax Law).
In other words, where an SME’s taxable income does not exceed AED 375,000, it will not be liable to pay Corporate Tax in the UAE. If an SME’s taxable income is AED 400,000, the SME will only be liable for Corporate Tax at the rate of 9% for the taxable income in excess of AED 375,000. Hence, the SME will only pay Corporate Tax at the rate of 9% on AED 25,000.
It is important to note that while the provision of Article 3(1)(a) of the Corporate Tax Law is mainly introduced for the benefit of SME’s, it does not apply only to SMEs and is applicable to all taxable persons for UAE Corporate Tax purposes. Though, naturally, SMEs will benefit the most from this provision.
Conclusion
In conclusion, noting that various conditions set within the Corporate Tax legislation, navigating the complex landscape of reliefs provided to small business within the Corporate Tax legislation can be a challenging journey. With the legislation and rules continuing to evolve, it is imperative for SMEs to make well-informed decisions that are in line with their financial targets and tax compliance obligations.
In this regard, it is noted that seeking professional legal advice will not only ensure a comprehensive understanding of the available small business relief provisions, but also provide customized guidance resulting in optimum tax strategies and long-term success.
This Article is prepared by Mohamed El Baghdady, Head of Tax and Financial Crimes, and Marwan Alnooryani, Senior Tax Associate, at Habib Al Mulla & Partners Law Firm.
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