FTA Explains the Small Business Relief Scheme for Corporate Tax Purposes
August 30, 2023
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
- Transfer pricing documentation
- Participation exemption
- Tax groups