Introduction

UAE issued its lodestar Corporate Tax Law 2022 (Federal Decree-Law No. 47 of 2022 on Tax of Corporation and Business). The Corporate Tax law will apply with effect from 1st June 2023.

The Corporate Tax Law provides a leading light on small businesses and has introduced this relief to help small businesses during challenging economic times by reducing their tax burden. In this blog, we shall express the key provisions of this decision and draw attention to the relief. If business owners want to know how it can benefit their business, they can discuss it with the best corporate lawyers in Dubai. 

A small business is one that qualifies as a Resident Person, which may elect to be treated as not having any taxable income for a tax period and, therefore, would pay zero corporation tax for that period (the “Small Business Relief”). However, the Corporate Tax Law did not specify the criteria that Resident Persons would need to meet in order to qualify for Small Business Relief – the criteria were to be announced separately by the Minister of Finance (the “Criteria”).

The Ministry of Finance has now specified and published the Criteria through Ministerial Decision No. 73/2023, which sets out the conditions for small businesses to claim Small Business Relief. 

Revenue Threshold:

The threshold has been set at AED 3 million, which means that for any Resident Persons who earn revenues in the UAE below this threshold and who otherwise meet the conditions described below, those businesses should be able to elect to pay zero corporation tax for the relevant tax periods. This threshold will apply to all tax periods from 1st June 2023 through to 31st December 2026, when the Ministry of Finance may decide to vary these thresholds.

When applying the revenue threshold, a Taxable Person’s revenue shall be determined in accordance with UAE applicable accounting standards. One can reach out to the best legal firm in Dubai to keep oneself updated with these standards. 

Conditions

The Small Business Relief only applies to a “Resident Person”. This is defined broadly as incorporating a managed and controlled test and an incorporation test, both of which derive from international tax principles.

The legislation precludes a Resident Person who claims Small Business Relief from claiming various other reliefs and deductions in the same tax period.

The following are precluded from making a Small Business Relief election:

1. A Constituent Company of a Multinational Enterprises Group with consolidated revenue exceeding AED 3.15 billion; and
2. A Qualifying Free Zone Person (i.e., a legal person incorporated, established, or otherwise registered in a Free Zone).

As per Article 21 of the Corporate Tax Law specifies that the small business relief must be claimed by way of an election. As such, it does not apply automatically. Regardless of whether the relief is claimed, Taxable Persons will be under an obligation to register for and file corporate tax returns. With the help of the best corporate lawyers in Dubai, this process can be completed with ease.

Also, it would be reasonable to assume that the Small Business Relief election would be made as part of the annual corporate tax return filing process; however, at this stage, the procedure for making the election has yet to be confirmed.

Loss Relief Restriction & Interest Deduction Limitation

In respect of any tax period regarding an election for Small Business Relief is made, any tax losses and any Net Interest Expenditure cannot be carried forward to any subsequent tax periods.

Anti-Abuse Rules

Where the FTA determines that a Person has artificially separated their business or business activity to fall under the prescribed revenue threshold and that Person has elected to apply for the Small Business Relief, this would be considered an arrangement to obtain a corporate tax advantage under the Corporate Tax Law anti-abuse rules. In these circumstances, the FTA has the power to decide to counteract the advantage by issuing an assessment.

Conclusion

It is important to note that relief is only available for a limited period of 12 months from the date that the decision comes into effect. After this period, small businesses will no longer be eligible for the relief. This is because the aim of the relief is to provide temporary support during challenging economic conditions. The finest way to utilize this relief scheme is to visit the best legal firm in Dubai and get a grasp of all the requirements and benefits. 

Such a decision has been made in accordance with the struggle to run a business that is loan free and profitable at the same time. This relief shall ease their tax burden and stay afloat.

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