- November 6, 2023
- Posted by: Shuraa Tax Consultant
- Category: Corporate Tax
The United Arab Emirates (UAE) has long been a haven for entrepreneurs and businesses seeking a favorable tax environment. As a result, the UAE Ministry of Finance introduced Ministerial Decision No. 73 of 2023 on April 3rd, setting the conditions for small businesses to claim Small Business Relief UAE corporate tax under the new Corporate Tax Law.
This ministerial decision aims to further promote UAE as the appealing destination for business growth and investment.
Let’s understand more about the new regime for corporate tax Law. Also, discuss how it going to affect the small businesses in UAE.
What is UAE Corporate Tax?
UAE Corporate Tax will be calculated on the taxable adjusted net profit of a business, which is the net profit after deducting all allowable expenses. Allowable expenses include the cost of goods sold, operating expenses, and net interest expense up to 30% of EBTDA.
The Federal Tax Authority (FTA) will require businesses to file an annual corporate tax return. Therefore, the return will need to include the business’s taxable profits and any other information required by the FTA.
A Taxable Person must also settle the Corporate Tax Payable within (9) nine months from the end of the relevant Tax Period, or by such other date as determined by the Authority.
Corporate Tax Rates Under the Corporate Tax Law
In December 2022, UAE introduced its new corporate tax regime through Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses.
This law, set to take effect from June 1, 2023, brings with it a headline tax rate of 9% for accounting periods beginning on or after this date. While this marks a shift toward taxation, it remains a competitive rate on the global stage.
The UAE Corporate Tax rate will be 9% on taxable income above AED 375,000. There will be a 0% tax rate on taxable income up to AED 375,000.
To calculate UAE Corporate Tax, businesses will need to start by determining their taxable income. Subsequently, the total income is reduced by subtracting all allowable deductions. These deductions encompass various items such as the cost of goods sold, operating expenses, and depreciation.
Here is an example of how UAE Corporate Tax would work:
A company has total income of AED 1 million for the year. The company’s allowable deductions are AED 500,000. Therefore, the company’s taxable income is AED 500,000.
The company’s corporate tax liability is calculated as follows:
The first 375,000 will be taxed at 0% and the rest of the amount will be taxed at 9 %.
1. 375,000 * 0% = 0
2. 500,000 – 375,000 = 125,000 *.09 = 11,250
The company will need to pay its corporate tax liability of AED 11,250.
Eligibility and Thresholds for Corporate Tax Rates
Ministerial Decision No. 73 of 2023 clarifies the eligibility criteria for Small Business Relief. Businesses with an annual revenue below AED 3 million (approximately USD 817,000) will qualify for this exemption.
Importantly, this threshold applies to each tax period, including both the relevant tax period and previous tax periods. Once a business’s revenue exceeds this threshold, the Small Business Relief will no longer be available.
It’s worth noting that businesses availing of this relief can still carry forward incurred tax losses. They can also disallow net interest expenditure from these tax periods for use in future tax periods, provided they elect not to apply for Small Business Relief for the UAE corporate tax.
However, it’s essential to note that the Small Business Relief exemption does not apply to Qualifying Free Zone companies or members of Multinational Enterprises (MNEs) with consolidated group revenues exceeding AED 3.15 billion. These entities will follow a different tax regime.
What is the Purpose of the Small Business Relief UAE Corporate Tax?
To support small businesses and nurture entrepreneurship, the Corporate Tax Law provides for a Small Business Relief exemption. This provision allows small businesses that qualify as Resident Persons to be treated as having no taxable income for a specific tax period.
The intent behind this relief is clear – to ease the tax burden on small enterprises, encourage their growth, and stimulate economic activity.
Opportunities for Entrepreneurs to Establish a Business in the UAE
With the introduction of Small Business Relief and a competitive corporate tax rate, the UAE continues to be an attractive destination for entrepreneurs and businesses. Moreover, here are some opportunities and advantages for those looking to establish a business in the UAE:
- Tax Incentives: Small businesses can take advantage of the Small Business Relief to reduce their tax burden, allowing for more flexible financial planning and growth strategies.
- Stability and Infrastructure: The UAE offers a stable political environment, world-class infrastructure, and a strategic location connecting East and West, making it an ideal hub for international business operations.
- Global Connectivity: The UAE’s advanced transportation and communication networks provide easy access to global markets, facilitating international trade and expansion. Furthermore, this strategic infrastructure positions businesses for seamless connectivity and growth on the global stage.
- Diverse Economy: The UAE’s diverse economy spans various sectors, from finance and technology to tourism and logistics, offering a wide range of business opportunities. Additionally, this economic diversity provides entrepreneurs with an abundance of options for investment and growth.
- Pro-Business Environment: The government’s commitment to promoting a pro-business environment is evident in its continuous efforts to streamline regulations and improve ease of doing business.
Streamline Your Taxation with Shuraa
The UAE’s introduction of Small Business Relief for the corporate tax marks a pivotal moment for entrepreneurs and small enterprises seeking opportunities in establishing business in the UAE. Furthermore, this initiative opens new avenues for growth and competitiveness in the local market.
However, the UAE taxation process might be a little overwhelming for entrepreneurs. That’s where Shuraa comes in!
To seize the advantages presented by Small Business Relief UAE corporate tax, businesses can benefit from the expertise of professionals like Shuraa Tax & Accounting Services.
As a team of knowledgeable and qualified accountants, auditors, and tax advisors in Dubai, UAE, Shuraa offers comprehensive taxation services, including UAE VAT, tax management, and accounting. Moreover, we stand ready to assist businesses in simplifying their taxation and financial management needs.