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What tax reliefs are available to UAE SMEs?

The UAE has long been recognized as a hub for innovation and entrepreneurship, attracting startups and small businesses from around the globe. However, with the recent introduction of corporate tax, which play a crucial role in shaping the business landscape, SMEs must navigate a new fiscal landscape that brings both challenges and opportunities. This article explores the impact of corporate tax on SMEs in the UAE and offers insights on how they can adapt to the changing tax regime and explore reliefs available. 

Along with the introduction of the Corporate tax, The Small Business Relief (“SBR”) provision was introduces which underscores the UAE's commitment to fostering a supportive environment for small enterprises. This article explores the impact of these tax policies on startups and small businesses, highlighting the support measures implemented by the UAE government.

Corporate Tax Impact on Startups and Small Business:
The UAE enacted Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, marking a significant shift in the nation's tax regime. Effective for tax periods starting on or after June 1, 2023, this law imposes a federal tax on corporate profits. The introduction of new tax regulations will significantly impact SMEs, requiring them to enhance their accounting and reporting practices to maintain accurate financial records and file timely tax returns. This may necessitate investing in new accounting software or hiring tax professionals. Additionally, SMEs will need to manage their cash flow effectively to ensure they have sufficient funds to meet tax obligations without disrupting operations. Developing tax-efficient strategies, such as utilizing deductions and credits, will be crucial to minimizing tax burdens and optimizing profitability. The corporate tax will also affect SMEs' profit margins, potentially more so than larger enterprises.

Small Business Relief
Recognizing the potential burden this could place on smaller enterprises, the government introduced the Small Business Relief (SBR) provision. This relief is designed to ease the compliance burden for eligible small businesses by treating them as having no taxable income, provided their revenue does not exceed AED 3,000,000 in any relevant tax period. This threshold ensures that a significant portion of startups and small businesses can benefit from reduced tax obligations during their formative years, allowing them to focus on growth and development.

Consider a startup in Dubai with annual revenue of AED 2,500,000. If the startup applied to benefit from the relief, it would be treated as having no taxable income, thereby avoiding corporate tax obligations. This will allow the startup to reinvest its earnings into development, expanding its operations, and growing its market presence.

Eligibility and Exclusions
To qualify for SBR, a business must be a resident taxable person, either a natural person or a juridical person. However, certain entities are excluded from this relief:

  • Members of Multinational Enterprise (MNE) Groups: Businesses that are part of MNEs with consolidated group revenues exceeding AED 3.15 billion are ineligible.
  • Qualifying Free Zone Persons: These entities, already enjoying a 0% corporate tax rate on qualifying income, and cannot claim this relief.

The exclusion criteria ensure that SBR targets genuinely small enterprises, providing them with the necessary support to thrive without being overshadowed by larger, more resource-rich entities.
Electing for SBR offers several practical benefits:

  • Simplified Tax Compliance: Eligible businesses are exempt from calculating taxable income and can file a simplified tax return, significantly reducing administrative burdens.
  • No Corporate Tax Payment: Businesses under SBR do not pay corporate tax on their income, providing crucial financial relief.
  • Streamlined Record Keeping: While maintaining records to demonstrate eligibility is required, the overall compliance requirements are less strict compared to the standard corporate tax regime.

However, businesses must still register for corporate tax and obtain a Tax Registration Number (TRN) to elect for SBR. Additionally, certain tax reliefs and deductions, such as those related to tax losses and interest deductions, are not applicable during the SBR period.

Beyond the tax relief, the UAE government has implemented various initiatives to support startups and small businesses. The Ministry of Economy has been instrumental in launching programs and policies aimed at fostering entrepreneurship and innovation. For instance, the National Program for Small and Medium Enterprises (SMEs) provides a comprehensive support system, including training, funding, and market access, to help SMEs scale and succeed.
The UAE's tax policies, particularly the introduction of the Corporate Tax Law and Small Business Relief, reflect the government's commitment to nurturing a vibrant startup ecosystem for SMEs and Startups. Yet, SMEs must proactively adapt to the new fiscal landscape by staying aware of the tax regime and developing tax-efficient strategies. By doing so, they can navigate the challenges and seize the opportunities presented by the evolving tax regime, contributing to their long-term growth and success in the UAE's dynamic business environment.

This article was originally published by Finance Middle East

This article, written by Shamma Al Falahi, Partner, discusses how the introduction of corporate tax poses challenges for SMEs in the UAE. However, the Small Business Relief provision aims to mitigate these challenges by supporting small enterprises with reduced tax obligations, fostering their growth within the evolving fiscal landscape.

BSA is a regional Law Firm in the Middle East with offices in the UAE, Oman and Saudi Arabia. As a full-service law firm our practice areas include litigation, arbitration and corporate services, including M&A, banking & finance, Intellectual Property, TMT, Fintech, employment and insurance.

Published on 24 June, 2024.

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