Small Business Relief for Corporate Tax in the UAE

PGP Tax Consultancy advises that the FTA has just released a Corporate Tax Guide on Small Business Relief for taxpayers with Revenue of less than or equal to AED 3,000,000 (approx. USD 800,000).

The new Guide provides an overview of:

• what the Small Business Relief (SBR) is;

• who is eligible for it;

• how it works and what benefits it gives;

• what the related compliance requirements are.

A fairly large block of the Guide is devoted to the topic of the artificial separation of business to benefit from SBR – the types of artificial separation, factors considered when determining whether a Business has been artificially separated and illustrative examples. The FTA has the power to counteract transactions or arrangements which have been entered into to gain a Corporate Tax advantage.

Small Business Relief

SBR is provided to small Businesses for Corporate Tax purposes in the UAE to ease their implementation of the Corporate Tax regime. Taxable Persons that have elected for Small Business Relief will benefit from both administrative and tax relief.

SBR will be available for Tax Periods that begin on or after 1 June 2023 and end before or on 31 December 2026.

Who is eligible for SBR?

In order to be able to elect for SBR, a Person:

• must be a Resident Person for Corporate Tax purposes;
  

• must have Revenue of less than or equal to AED 3,000,000 in the relevant Tax Period and any previous Tax Periods;
  

• should not be a member of MNEs or a Qualifying Free Zone Person (a Free Zone resident that is not Qualifying can benefit from SBR).

In the Guide, the FTA provides several interesting clarifications concerning the conditions to be met.

1. Resident Person

Before the Guide was released, taxpayers had doubts as to whether a Natural Person could benefit from SBR.

The FTA clearly provides that a Natural Person is considered a Resident Person for Corporate Tax purposes if they conduct a taxable Business or a Business Activity in the UAE. Whether a Natural Person derives taxable income above the AED 1,000,000 threshold during a Gregorian calendar year, he may be able to claim Small Business Relief (if all the requirements are met).

It is also worth paying attention to the fact that the PEs in the UAE of Non-Resident Persons would not be eligible for SBR as they are not considered Resident Persons.

However, if the Non-Resident Person is based in a country which has a DTT with the UAE and if that Treaty includes a provision dealing with non- discrimination of a Permanent Establishment, its UAE PE would be eligible for SBR if the required conditions are met.

Conversely a foreign legal entity that is effectively managed and controlled in the UAE will be a Resident Person and thus can benefit from SBR.

2. Revenue threshold

In order to be able to elect for Small Business Relief, a Person must have Revenue of less than or equal to AED 3,000,000 in the relevant Tax Period and any previous Tax Periods.

While calculating the Revenue for the purposes of determining the right to elect for SBR, a business may apply either IFRS (or IFRS for SMEs) or the Cash Basis of Accounting. However, the FTA has the right to challenge this choice if the outcome is unreasonable.

Another point that businesses need to pay attention to is that all income, even if it would not be taxable (for example, dividends from UAE companies), must be included when calculating Revenue for SBR purposes.

How SBR works and what benefits it gives?

A Taxable Person that meets the conditions for SBR and wishes to benefit from the relief must make an election in his Tax Return. This election must be made for each Tax Period when a Tax Return is filed.

An important notice from the FTA is that once the Tax Return for the relevant Tax Period has been submitted with no election to benefit from the SBR, there will be no possibility to claim this benefit at a later stage.

But should one do if a business made a mistake (for example, when calculating Revenue) and for this reason did not elect for SBR when filing a Tax Return? Is it possible to correct the error by submitting a Voluntary Disclosure and elect to apply SBR? At first glance, the guide does not provide an opportunity for such an interpretation. But the issue is controversial and the practice may differ.

What benefits does SBR give?

The Persons that have elected for SBR will benefit from both:

When a Taxable Person elects for SBR, the other reliefs will not apply in that Tax Period. For example, in this Tax Period the Taxable Person will not be able to accrue, utilize or transfer Tax Losses. But since the election for SBR must be made in a Tax Return (not earlier), the Taxable Person may calculate its revenue and expenses and, if there are Tax Losses, does not elect for SBR and instead carries forward Tax Losses to future Tax Periods.

What are the related compliance requirements?

The Taxable Person that has elected for SBR has to follow related compliance requirements:

1. requirement to self-assess, register and make an election.
   The Taxable Person seeking to claim SBR will need to register with the FTA for Corporate Tax and to obtain a TRN in order to be able to make the election. It is then obliged to assess its Revenue and elect for the relief through the filing of a Tax Return.

2. requirement to file Tax Returns.
   The requirement to file Tax Returns is not impacted by the eligibility for the SBR.

3. records required to be kept to demonstrate Revenue.
   The Tax Person will need to keep information to demonstrate their eligibility for the relief. This includes keeping records of their Revenue.

According to the FTA, examples of documents which need to be kept include but are not limited to:

• bank statements;

• sales ledgers;

• invoices or other records of daily earnings, such as till rolls;

• order records and delivery notes; and

• other relevant Business correspondence.
  
  

Conclusions

SBR is a beneficial opportunity for businesses that are just developing in the UAE, both in terms of tax and administrative relief. SBR is also available to companies registered in Free Zones, provided that they elect to pay Corporate Tax on a regular basis and not use the preferential Free Zones regime.

However, businesses need to carefully study compliance with the conditions for the application of SBR, as well as to ensure that they meet all related compliance requirements.