A corporate tax is a tax that is applicable to the taxable profits of a company. Taxable profit is the profit after all allowable expenses as per the tax laws of a country. In the UAE, the concept of corporate tax is under debate after the introduction of a new law, Federal Decree-Law No. 47 of 2022. According to this law, businesses will be subject to corporate tax (CT) starting June 1, 2023. The standard rate of CT will be 9%. However, businesses will be subject to a 0% CT rate for annual profits up to AED 375,000. Thus, the impact of corporate tax on small and medium enterprises (SMEs) will be minor. Furthermore, the UAE government has recently announced Small Business Relief (SBR) for small businesses and startups in order to provide an attractive business environment for SMEs.
Impact of corporate tax on SMEs: a plus and a minus:
Corporate tax (CT) has a substantial impact on the small and medium enterprises (SMEs) sector in the UAE. As they contribute to the country’s economic growth, SMEs are the backbone of the UAE’s economy. The introduction of CT has both benefits and drawbacks for SMEs in the UAE.
Benefits: The government can create a favorable business environment for SMEs with the revenue generated by CT. For instance, they can fund infrastructure development for SMEs. Furthermore, the government can also support the growth and development of SMEs through grants and subsidies.
Drawbacks: SMEs may see an increase in their compliance costs and other administrative costs due to CT. Resultantly, their profitability will reduce, and they will see a decline in their competitiveness. Furthermore, as SMEs usually have limited funds, the CT will affect their cash flow. In this way, SMEs will not be able to expand their businesses and invest in new technology and people. However, the 9% CT is only applicable for taxable profits of over AED 375,000. This limits the negative impact of CT. Furthermore, the introduction of SBR will also help a lot of small businesses reduce their costs.
Impact of corporate tax on SMEs; Small Business Relief (SBR):
The Ministry of Finance has released a new Ministerial Decision No. 73 of 2023, which relates to Small Business Relief (SBR) in line with the Corporate Tax Law, Federal Decree-Law No. 47 of 2022. This decision is in accordance with Article 21 of the Corporate Tax Law. It declares that a taxable individual will not be liable to pay any taxes if their earnings do not exceed a particular limit during a specific tax period. The objective of SBR is to reduce the corporate tax burden and compliance expenses for small businesses. The Ministerial Decision outlines the criteria for taxable individuals to qualify for Small Business Relief.
The following are points of the ministerial decision:
1) The SBR can only be claimed by the resident taxable person whose revenue does not exceed AED 3 million in the relevant tax year and each of the preceding tax years. A business cannot claim SBR if revenue surpasses AED 3 million in any tax period.
2) The effective period for the AED 3 million revenue threshold is June 1, 2023, to December 31, 2026. This means that businesses can claim SBR for tax periods starting on or after June 1, 2023, and ending on or before December 31, 2026.
3) The revenue can be calculated based on the applicable accounting standards in the UAE.
4) Small Business Relief is not applicable to:
a) Qualifying Free Zone Persons
b) members of Multinational Enterprise Groups (MNE Groups) as defined in Cabinet Decision No. 44 of 2020.
MNE groups are companies that are operating in more than one country and have revenue of over AED 3.15 billion.
5) In tax periods where businesses do not elect for SBR, they can carry forward their tax losses and disallowed net interest expenditure to future taxable years where SBR is not elected.
6) As per the decision, if FTA discovers that a taxable person artificially separates its business or business activity and claims for SBR while the revenue exceeds AED 3 million, it will be considered an arrangement to obtain a CT advantage under the CT law.
SMEs may face increased compliance and administrative costs due to corporate tax (CT). However, the revenue generated from CT can be used to create a favorable business environment for SMEs through infrastructure development, grants, and subsidies. Furthermore, the introduction of Small Business Relief (SBR) will provide relief to many small, micro, and startup businesses, reducing their corporate tax burden and compliance expenses. Overall, it is important for SMEs to stay informed, take advantage of available exemptions and relief measures, and continue contributing to the growth of the UAE’s economy.
In conclusion, while the impact of corporate tax on SMEs in the UAE depends on various factors, the government’s efforts to provide relief and support to SMEs, coupled with the country’s overall low tax environment, make it a favorable place for SMEs to establish and grow their businesses.
CZTA at your service:
As a specialized firm for SMEs and startups, we have experts that can tailor services according to your needs. When there is a relief, why not take it, boost your profits, and invest in the business’s growth? Our experts will assist you with the SBR and any other tax relief. For any service, including but not limited to corporate tax, feel free to contact us.