The UAE issued its landmark Corporate Tax Law in December 2022 (Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses). The Corporate Tax Law applies with effect from 1 June 2023.
The Corporate Tax Law provides a framework whereby small businesses who qualify as Resident Persons 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”).
Small Business Relief - Criteria
The Ministry of Finance has now published the Criteria through Ministerial Decision No. 73 of 2023, which sets out the conditions for small businesses to claim Small Business Relief.
The revenue threshold has been set at AED 3 million (approx. US$816k). This 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 1 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.
The Small Business Relief only applies to a “Resident Person”. This is defined broadly, 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:
- a Constituent Company of a Multinational Enterprises Group with a consolidated revenue exceeding AED 3.15 billion; and
- a Qualifying Free Zone Person (i.e. a legal person incorporated, established or otherwise registered in a Free Zone).
Article 21 of the Corporate Tax Law specifies that 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. 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 in respect of which 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.
Where the FTA determines that a Person has artificially separated its business or business activity in order to fall under the prescribed revenue threshold, and that Person has elected to apply 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 make a determination to counteract the advantage through issuing an assessment.
Relief for small businesses is a feature of corporate tax regimes in a number of other jurisdictions, such as Hong Kong and the UK. However, the Small Business Relief is comparatively generous in that it provides for a complete exemption from corporate tax as opposed to a reduced rate. It is not sector or industry specific, and it does not require a minimum number of people to be employed by a business.
Given the generous nature of the relief, the powers conferred on the FTA by the legislation to verify the that Criteria have been met and to counteract a corporate tax advantage take on a greater significance. It follows that any Taxable Person making a Small Business Relief election should be fully satisfied that the Criteria have been met and that proper records have been kept.
As currently structured, the Small Business Relief threshold should take many small businesses in the UAE outside the charge of corporate tax. However, as with any election, various considerations such as the effect of the loss relief restriction should be considered before an election is made in respect of a tax period.
It should be noted that the Criteria will only apply to any tax periods which end before or on 31st December 2026. Another Ministerial Decision will have to be issued in respect of tax periods after this date at which point it will be interesting to see how the Ministry of Finance adapts the Criteria, and whether (for example) it replaces the Criteria with a scheme of reduced rates for lower revenue businesses.