The UAE has announced a new corporate tax relief scheme for small businesses under Federal Decree Law No 47. Under the scheme, qualifying companies will be exempted from paying corporate tax in UAE from 31 June 2023 to 31 December 2026. This move is part of the UAE government's efforts to foster a more supportive business environment and promote economic growth.
Purpose of Corporate Tax Relief
Small startups are considered the backbone of any economy, as they provide new job opportunities, encourage innovation, and drive growth. However, many small businesses face financial challenges in their early years, as they struggle to establish themselves in a competitive market. The cost of compliance and taxes can be particularly burdensome for small startups, as they have limited resources and may not have the same economies of scale as larger corporations. That's why the UAE has implemented tax relief for such startups.
Advantages of Corporate Tax Relief
By exempting eligible small businesses from corporate tax, the UAE government is aiming to reduce the financial burden on these companies, allowing them to focus on growing their business and creating new jobs. This measure will help to level the playing field between small businesses and larger corporations, making it easier for startups to compete in the market.
Criterion to qualify for small business relief
To qualify for the corporate tax relief scheme, businesses must meet the specific criterion set, such as being registered in the UAE and having a turnover of less than AED 3 million per year. The scheme is open to all types of businesses, including those in the manufacturing, service, and trading sectors.
Read More: Who is Exempt from the UAE Corporate Tax?
Scope of tax relief for small businesses in UAE
According to the Ministerial Decision, businesses in these tax periods would have the ability to move on with any tax losses and refused total interest expenditure to use in future tax periods.
This means that even if a business does not take advantage of the tax relief scheme, it will still be able to benefit from the carry-forward provisions for tax losses and disallowed net interest expenditure. These provisions allow businesses to offset future tax liabilities with previous losses or expenses, reducing their overall tax burden.
The ability to take forward taxation losses and refused net interest expenditure is particularly beneficial for small businesses that may experience fluctuations in income and expenses. For example, if a small business incurs losses in one tax period, it can offset those losses against future profits to reduce its tax liability. This can help to ease the financial burden on small businesses during times of hardship, allowing them to stay afloat and continue to operate.
Misuse of Corporate Tax relief
The UAE government's announcement regarding corporate tax relief for small businesses also includes measures to prevent the artificial separation of business activities. The statement explains that if a taxable person has artificially separated their business or activity in order to take advantage of the Small Business Relief scheme, and their entire income surpasses Dirhams 3 million in any taxable time period, this will be deemed as an agreement to acquire a company tax benefit as per Clause One of Article Fifty concerning the prevalent anti-abuse regulations of the Corporate Tax Law.
This provision is in line with the UAE's commitment to preventing tax avoidance and ensuring a fair and transparent tax system. By preventing the artificial separation of business activities, the government aims to ensure that small businesses are not unfairly disadvantaged compared to larger corporations that may have more resources to engage in complex tax planning.
In conclusion, the UAE's new tax relief scheme for small businesses is a positive development that is expected to have a significant impact on the country's economy and startup ecosystem. By exempting eligible small businesses from corporate tax in UAE for two years, the government is reducing the financial burden on these companies, allowing them to focus on growing their business and creating new jobs. This measure is part of the UAE's broader efforts to support small businesses and promote a more supportive business environment in the country.
Choose the best consultation
It is imperative for small businesses to have an in-depth understanding of the UAE corporate tax law. Our expert tax consultants can assist you in this regard by providing adequate guidance on distinct tax matters. Thus, contact us today and we shall be happy to assist you.
Ahmad Al Zain
Ahmad is an accomplished legal associate with more than 5 years of experience, he is adept in navigating the complex tax codes at federal, state and local levels. He has immense aptitude in conducting tax investigations and tax litigation. He is well-versed in offering expert tax advisory and handling tax arbitration procedures in international and local jurisdictions. Further, he has comprehensive expertise in drafting a wide scope of tax documents and negotiating intricate tax disputes with the Federal Tax Authority.