The UAE Federal Tax Authority (FTA) has introduced Small Business Relief to support small and medium enterprises (SMEs) and startups by easing their tax compliance and administrative burdens. This initiative has been widely welcomed by the business community in the UAE. The FTA has published a detailed guide on Small Business Relief (Corporate Tax Guide | CTGSBR1 Small Business Relief). In this article, we will explore the benefits of Small Business Relief, when to elect this relief, and when it might not be advantageous.
Advantages and Disadvantages of Availing Small Business Relief in UAE Corporate Tax
Advantages
Tax Exemption
Eligible businesses would have to file the Corporate Tax Return and declare that they do not have taxable income in the relevant tax period. If your revenue is below AED 3 million and you choose Small Business Relief, it is considered that there is no taxable income and no Corporate Tax Liability. This can significantly reduce your tax burden.
Simplified Compliance
Small businesses benefit from simplified tax compliance requirements. They are not required to carry forward tax losses or net interest expenditures incurred during the periods they elect for Small Business Relief. This reduces the administrative burden, as they only need to declare their revenue and submit the tax return.
Cash Flow Management
By reducing or eliminating the Corporate Tax burden, small businesses can better manage their cash flow. This allows them to reinvest in their operations and growth, providing a significant boost to their financial health.
Transfer Pricing Documents
Businesses that opt for Small Business Relief are not required to prepare transfer pricing documents for UAE Corporate Tax purposes. However, transactions between related parties must still be conducted at arm’s length.
Disadvantages
Ineligibility for Other Reliefs
Businesses that choose Small Business Relief cannot carry forward tax losses or net interest expenditures to subsequent tax periods. This could be a disadvantage if the business incurs significant losses or interest expenses.
Revenue Threshold Limitation
The relief is only available to businesses with revenue not exceeding AED 3 million per tax period. If a business’s revenue exceeds this threshold in any relevant or previous tax period, it becomes ineligible for the relief.
Artificial Separation of Business
The FTA may consider the artificial separation of business activities as an arrangement to obtain a Corporate Tax advantage, which could lead to penalties and disqualification from the relief.
Exclusion of Certain Entities
Certain entities, such as constituent companies of multinational enterprise groups and qualifying free zone persons, are not eligible for Small Business Relief.
Key Points Regarding Small Business Relief in UAE
Corporate Tax Registration and Return Filing
Eligible businesses must still comply with tax registration and return filing requirements. The election for Small Business Relief is available at the time of filing the tax return and is not automatic.
Residency Requirement
Small Business Relief is available only to resident persons. Both natural persons and juridical persons who are residents for UAE Corporate Tax purposes can elect Small Business Relief. Non-residents with a Permanent Establishment or Nexus in the UAE are not eligible.
When to Elect Small Business Relief
If your taxable profit is AED 375,000 or more, it is ideal to elect Small Business Relief. However, if your revenue is below AED 3 million and you have recorded a tax loss, it is not recommended to elect Small Business Relief, as the recorded tax loss cannot be carried forward.
Revenue Threshold and Accounting Basis
Small Business Relief is applicable for taxable persons with annual revenue less than AED 3 million. These businesses are, by default, on a cash basis of accounting. If they wish to change to an accrual basis, they need to elect this option.
Availability Period
Small Business Relief is available for tax periods ending before 31 December 2026. If your revenue exceeds the AED 3 million threshold in any current or previous tax period, you are not eligible for Small Business Relief in the current or future tax years.
Pro-rated Threshold for Varying Tax Periods
If your tax period is longer (12 to 18 months) or shorter (6 to 12 months), the AED 3 million threshold is pro-rated accordingly.
Conclusion
Understanding and leveraging Small Business Relief can significantly benefit your SME or startup by reducing tax compliance and administrative burdens. However, it is crucial to carefully consider the eligibility criteria and potential disadvantages. If you need expert guidance on Small Business Relief or any other aspect of UAE Corporate Tax, contact Beyond Numbers. Our experienced professionals can help you navigate the complexities and ensure your business remains compliant and competitive in the UAE market.