Guide for using Small Business Relief under UAE Corporate Tax Law

Under Ministerial Decision No. 73 of 2023, the Minister of Finance clarifies the qualifications for small business relief scheme including its procedures, thresholds and benefits. In this article, we explain the specifics for UAE companies and eligible businesses on how you can maximize this conditional incentive for corporate tax purposes.

What is Small Business Relief (SBR)?

Small business relief is a form of financial incentive and temporary tax exemption organized by the national government to help SMEs with tax burdens and compliance costs. This is designed to reduce taxable income to zero for the relevant tax period for eligible small businesses.

However, this relief does not remove the requirement for filing a return, even though tax payable will technically be zero as a result.

Small business relief under the UAE corporate tax laws (Federal Decree Law No 47. of 2022) is only available for tax periods starting on or after 1 June 2023 and ending on or before 31 December 2026. As of today’s publishing, it is not currently applicable beyond 2026 unless the law is extended by a future Federal Tax Authority or Ministry of Finance decision.

Eligibility Criteria for Corporate Tax Relief

Under Ministerial Decision No. 73 of 2023, small business relief covers certain eligible SMEs that follow the following criteria:

1. Taxable person must be a UAE resident
2. Revenue must not exceed a threshold set by the Minister, capped at AED 3 million annually (no including VAT, of course) within the current and all previous tax periods ending
3. Businesses who are not:
   1. Members of an multinational enterprise group (MNE)
   2. Free zone entities under the Qualifying Free Zone Persons (QFZPs) status

Revenue threshold of SBR for corporate tax purposes

The Decision clarifies that the AED 3 million threshold applies to the current tax period, and all previous tax periods. Once exceeded, the business permanently loses eligibility for SBR.

For SBR eligibility, this is the maximum revenue limit that a business can have. This is based on gross revenue of the company, not on profit or taxable income.

As a result, a business can be loss making and still fail the threshold (or be highly profitable) and still qualify if revenue < AED 3 million.

What counts as revenue for the AED 3 million threshold?

Qualifying businesses can base their annual revenue for the tax period from the following:

• Sale of goods
• Service income
• Subscription fees (if you’re a SaaS company, especially)
• Management fees
• Asset disposals
• Other operating income

Revenue excludes:

• VAT collected on behalf of the government
• Any calculation or adjustments for expenses, deductions or reliefs.

Who is Not Eligible for Small Business Relief (Multinational Enterprise Groups and Qualifying Free Zone Persons)     

Meeting the eligibility criteria does not automatically grant Small business Relief to the taxable person. The relief must be explicitly elected in the corporate tax return in order to qualify.

However, certain profiles are considered automatically non eligible for the program. Here are some examples of businesses that are expressly excluded even if their revenue is below AED 3 million or they are early stage with low income earned.

1. Members of an multinational enterprise group (MNE)
   The legal definition identifies MNEs as any group that includes:
   
   1) Two or more companies the tax residence of which is located in different jurisdictions, or including one single company having its tax residence in one country and being subject to tax with respect to the activity it carries out through a permanent entity located in another country; and
   
   2) Which has a total consolidated group revenue that is equal to or more than AED 3,150,000,000 (UAE Dirhams Only Three Billion One Hundred and Fifty Million) during the Fiscal Year immediately preceding the Reporting Fiscal Year as indicated in its Consolidated Financial Statements
   
   This generally means that two or more entities are:
   a) related;
   b) tax resident in different countries; or
   c) one entity with a permanent establishment in another country.
   
2. Qualifying free zone persons
   A free zone entity that meets specific conditions under UAE corporate tax law to benefit from a 0% tax rate on qualifying income and 9% on non qualifying income.
   
   This is because QFZP’s are subject to separate taxation rules.

Additionally, companies that do not follow the eligibility criteria are not considered under SBR:

• Non-Resident Persons
• Persons breaching prescribed conditions

How SBR avoids corporate tax avoidance

Relief cannot be used for tax avoidance purposes. As a result, the Ministerial Decision empowers the Federal Tax Authority (FTA) to deny Small Business Relief where:

• A business is artificial separation
• Arrangements are made primarily to stay below the AED 3 million threshold

Under artificial separation, the UAE government mandates that if related parties are used to artificially split the revenue to qualify for the AED 3 million threshold, shift income between entities, and recharacterise transactions to qualify for SBR, the FTA may flag and refuse for claim corporate tax relief.

This prevents those looking to abuse the relief program.

How does Small Business Relief work for Resident Persons?

When a business elects Small Business Relief, they are treated as having no taxable income for that specific tax period. Because taxable income is set to zero by law, corporate tax payable is nil and the usual Corporate Tax calculation steps are skipped for the year.

Apart from financial relief, businesses can opt in for administrative relief as tax calculation is made simpler. The following rules of corporate tax laws do not apply when SBR is elected.

1. Exempt Income
   Normally, businesses must identify nontaxable income (e.g. qualifying dividends) and deduct that from accounting profit. Under SBR, this step is not required and all income is effectively ignored for tax purposes for that period.
2. Other Tax Adjustments
   Other adjustments that would normally reduce tax income do not apply because there is nothing left to reduce when tax eligible income is already treated as zero.
3. Eligible deductions (deductible vs non deductible expense treatment)
   Normally, such businesses must determine deductible and non deductible expenses, but under SBR, these expenses are no longer assessed. There are no deduction rules for that tax period.
   
   Additionally, another disadvantage of SBR is you cannot carry forward the interest expenses as the limits set out in regulation. This means that if interest expenses exceed the allowable limits in a tax period, the excess interest cannot be deferred to future periods for deductions.
   
   As a result, businesses with heavy financing structures or significant borrowing costs may find SBR less beneficial despite the short term tax savings.
4. Tax loss relief
   Normally, tax losses can be “carried forward” and used to offset future profits. When SBR is applied, tax losses cannot accrue and be used or generated for that period. Loss utilisation is effectively paused for that year.
   This is the main drawback for using SBR for businesses that are loss making.
5. Transfer pricing documentation is not required for the period.
   Under SBR, businesses must still comply with transfer pricing rules (under Article 55 of the UAE Corporate Tax Law) by ensuring that all related party transactions are conducted with arm’s length principle and reflect market value. Formal transfer pricing documentation is not required for the period.

How to Calculate Revenue for Small Business Relief 

To determine whether a business is eligible to claim small business relief, revenue must be calculated in a specific way under the UAE Corporate tax law.

Businesses must follow applicable accounting standards and use accrual basis accounting by default. Businesses can only use cash basis accounting in their records if expressly allowed. Using the wrong accounting basis can overstate or understate revenue, and incorrectly trigger or deny SBR as a result.

What Counts as part of the Revenue Threshold

Revenue means the gross amount of income arising from business activities derived by a Taxable person during the relevant tax period/s. This number is calculated before deducting any expenses or costs, in accordance with Federal decree law no 47 of 2022.

Revenue must be determined using standalone financial statements for the current and previous tax periods.

	Calculating Revenue	Examples
Revenue and Gross Business Income	Add all gross business income to arrive at final number as earned in their licensed business activities	Investment income including dividend income Core operating income from sale of goods and services rendered Licensing fees, royalties and commission income Asset related income including gains and lease or rental income Other business related income (forex gains, insurance proceeds, recoveries or reimbursements, bonuses and government grants or subsidiaries recognized as income (if applicable))
Operating Expenses	Do not deduct expenses (partial or fully deductible)	Salaries Rent Depreciation
Tax Adjustments	As mentioned, there is no need to apply the following since eligible tax income is now 0	Exempt income adjustments Deductions Tax Relief or other corporate tax exemptions Tax loss and any carry forward from past tax periods

The AED 3 million threshold is a hard revenue cap for Small Business Relief. Once a business exceeds it in any tax period, Small Business Relief is no longer available even if revenue for future tax periods falls below the threshold.

How to Apply for Small Business Relief

To opt in for Small Business Relief, you can follow these steps and ensure that documents are filed correctly in your tax filing.

1. Step 1: Ensure you are registered to access corporate tax advantage
   You must have a valid CT Tax registration number (TRN). Registration is completed with the FTA.
2. Step 2: File your CT return via EmaraTax
   SBR is elected through your returns and made when filing for declaration on EmaraTax. There is no separate application form needed for this.
3. Step 3: Explicitly elect for SBR
   Even if you meet all the criteria, the relief does not apply automatically and you need to opt in for the relevant tax period when filing. By electing for relief, it avoids filing a full CT return and paying owed tax.
4. Step 4: Submit your returns by the filing deadline (within 9 months from the end of the tax period)
   Even if you qualify for SBR and have no need to complete a full tax computation, you must still submit a CT return within the deadline to avoid penalties.
5. Step 5: Maintain records to support eligibility
   The FTA may request records to verify that your revenue is within the threshold and that your business is not a MNE group member or a Qualifying Free Zone Person status.

Compliance Requirement and Record-Keeping

Like with other taxable persons under new corporate tax regime, businesses that fall under SBR must keep compliant and protect themselves from penalties by keeping full and clean records of the business.

The following supporting documents must be retained for at least seven years:

• Financial statements and supporting documents (i.e. bank statements)
• Revenue breakdowns
• Accounting records such as invoices, etc

FTA may audit within next 7 years from the end of period in which return was submitted, and incorrect claims will lead to loss of relief and additional administrative penalties. Likewise, it is within the scope of the Federal Tax Authority to request financial and supporting records, and verify its consistency with accounting standards.

Failure to maintain required records and information is penalized at AED 10,000 for each violation and AED 20,000 if same violation is repeated within 24 months. Failure to cooperate with a tax audit can amount to penalty of AED 20,000, which applies to Person, Legal Representative, or Tax Agent.

Conclusion on Small Business Relief under UAE corporate tax laws

Small business relief is a temporary relief and tax incentive designed to ease tax burdens. This allows owners to grow and adjust in a time limited capacity. While some other tax benefits are structural, SBR allows for businesses to ease into the UAE tax regime, given that they are eligible to apply and subject to the revenue cap and anti-abuse rules.

In the end, it pays to have a professional supporting your journey navigating the complications under UAE CT Laws. With Skrooge, we can help you by:

• Keeping your books consistent and clean with an easy-to-navigate record of your transactions
• Ensure that revenue figures align with financial records and tax return disclosures
• Flag inconsistencies especially on the accounting basis used across periods
• Set up reminders on deadlines in order to stay compliant.

Our AI-powered technology platform, together with our human experts, is designed to become your fractional CFO as you grow. To get started, simply book at 15-minute call and check out our website.

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