10 Apr 2023

Ministry of Finance releases details on Small Business Relief

Authored by: Theunis Claassen

Following last year’s release of Federal Decree-Law No. 47 of 2022 (the Corporate Tax (CT) Law), corporate tax is set to commence for financial years starting on or after 1 June 2023. Subject to certain exceptions such as free zone relief, corporate tax will generally be imposed on Taxable Income at a rate of 9%, with the first AED 375,000 being taxed at a rate of 0%.

In addition to the 0% rate for taxable income up to AED 375,000, small businesses with revenue below AED 3 million can claim ‘Small Business Relief’ (SBR) under certain circumstances and be treated as having derived no taxable income during a relevant Tax Period. The Ministry of Finance has indicated that the SBR aims to support start-ups and other micro or small businesses by reducing their initial corporate tax burden and compliance costs.

In this newsflash we briefly consider the requirements and tax consequences of the SBR for taxpayers.

Small Business Relief

In terms of Article 21 of the CT Law, a Resident Taxable Person may elect to be treated as not having derived any Taxable Income for a Tax Period where:

  • the Revenue of the Taxable Person for the relevant Tax Period and previous Tax Periods does not exceed a threshold to be set by the Minister; and
  • the Taxable Person meets all other conditions prescribed by the Minister.

Revenue Threshold

In terms of the recently issued Ministerial Resolution No. (73) of 2023 (the Resolution), the revenue threshold has been set at AED 3 million. A taxpayer will therefore be able to claim SBR where its revenues for the relevant tax period and all previous tax periods does not exceed AED 3 million in each tax period concerned. The threshold applies to tax periods commencing on or after 1 June 2023 and will continue to apply to subsequent tax periods ending on or before 31 December 2026. It remains to be seen whether the SBR will ultimately be phased out at that stage or whether the threshold will merely be adjusted.   

Other Requirements

The Resolution also provides guidance on the other conditions that a small business would need to comply with, including:

  • The SBR will not be available to entities based in a free zone or entities that are member companies of multinational groups with total consolidated group revenues of more than AED 3.15 billion.
  • The small business entity’s revenue must be determined based on applicable and accepted accounting standards in the United Arab Emirates.

Tax Implications

In terms of Article 21, where SBR applies to a Taxable Person, the following provisions of the Law shall not apply:

  • Exempt Income as specified in Chapter Seven of the CT Law: this includes among others the exemption in respect of local dividends and the participation exemption provided for in Article 23.  
  • Reliefs as specified in Chapter Eight of the CT Law: this includes the tax reliefs provided in respect of transfers within a qualifying group as well as in respect of business restructuring relief.  
  • Deductions as specified in Chapter Nine of the CT Law: this includes the general deduction formula as contained in Article 28, thereby essentially disallowing any tax deductible expenses. This would also prevent the entity from carrying forward any Net Interest expenditure incurred in such Tax Period to a subsequent Tax Period. However, the Resolution provides that any Net Interest expenditure incurred in a prior Tax Period where SBR was not claimed, may be carried forward to a subsequent Tax period in which SBR is again not claimed.     
  • Tax Loss relief as specified in Chapter Eleven of the CT Law: this would essentially exclude the entity’s ability to offset tax losses against taxable income in any period that SBR is claimed or carry forward any tax losses incurred in such tax period. The entity will also be prohibited from transferring any tax losses to another taxable person. However, the Resolution provides that any unutilised tax losses incurred in a prior Tax Period where SBR was not claimed, may be carried forward to a subsequent Tax period in which SBR is again not claimed.     
  • Article 55 of the CT Law: this article deals with the transfer pricing documentation that has to be maintained by a Taxable Person. Based on FTA Guidance, businesses that claim SBR will not have to comply with the transfer pricing documentation requirements.

Audit and Anti-Avoidance

Article 21 provides that the Federal Tax Authority (FTA) may take the necessary measures to verify an entity’s compliance with the conditions to claim SBR and may request any relevant information or records from the Taxable Person within the timeline prescribed by the FTA.

With regard to an artificial separation of business, the Resolution stipulates that if the FTA can establish  that persons have separated their business or business activity in an artificial or fictitious manner and that the revenues of the entire business or business activity exceeds the AED 3 million limit in any tax period where the SBR has been claimed, this shall be considered an arrangement to obtain a benefit related to corporate tax in accordance with the CT Law (Clause 1 of Article 50 of the General Anti-Abuse Rule).

In assessing whether artificial business separation has occurred, the FTA shall consider whether the arrangement was undertaken for a valid commercial purpose and whether the persons carry on substantially the same Business or Business Activity by taking into account all relevant facts and circumstances, including but not limited to their financial, economic and organisational links.

Hadef & Partners Tax Service Offering for Small Businesses

As illustrated above, the SBR dispensation provides a considerable tax benefit to small businesses, both from a tax and compliance perspective. However, taxpayers should carefully consider their particular circumstances and evaluate whether SBR is beneficial to them taking into account the limitations on tax deductions, exemptions, reliefs and tax losses. Depending on a taxpayer’s specific facts and circumstances, it may be preferable to not apply the SBR given these restrictions. Furthermore taxpayers should also ensure that they comply with the thresholds and that they retain the necessary documentation in support of any future FTA audits.  

In order to ensure that your business adopts the most appropriate tax structure while simultaneously mitigating unwanted tax risk, the Tax Team at Hadef & Partners is available to discuss these and other questions you might have regarding your business’ tax affairs and its general preparedness in respect of the new corporate tax regime.  

In particular, Theunis Claassen from our Tax Team, can guide you in identifying key areas of your business that will be impacted by the new corporate tax regime and assist you with specialist tax planning and implementation of appropriate mechanisms to achieve optimal tax outcomes for your business.

Please feel free to contact Theunis Claassen, our Head of Tax, to arrange an initial discussion regarding your business and its taxes.

 
 

This article, together with any commentary, does not constitute legal advice. It is provided solely for information purposes on a complimentary basis, without consideration of any specific objectives, circumstances or facts. It reflects then current views of the writer which may modify in time and based on differing objectives, circumstances or facts. A writer's view may differ from views of colleagues and/or the firm. You should seek legal advice on each specific matter. Access to this article does not form an attorney-client relationship.