The UAE Ministry of State for Financial Affairs has introduced a significant development affecting small businesses and corporations. Ministerial Decision No. 73 of 2023 offers tax relief for qualifying small businesses as part of the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses. But what exactly does this entail, and how can small businesses benefit? Let’s break down this development and explain its implications using an easy-to-understand example.
The Concept of Small Business Relief
Firstly, we need to understand the central theme of the decision: Small Business Relief. As detailed in Article 21 of the Federal Decree-Law No. 47 of 2022, Small Business Relief allows eligible businesses to treat their taxable income as zero for a specific tax period. This essentially means qualifying small businesses will not have to pay any corporate taxes during the eligible period.
Imagine a local bakery in Dubai, “Yummy Bakes,” that has an annual revenue of AED 2.5 million. Because its revenue falls under the defined threshold of AED 3 million, Yummy Bakes could choose to opt for Small Business Relief, thereby benefitting from not subject to any corporate tax during that period. This relief commences from the tax period starting on 1 June 2023 and will apply until 31 December 2026.
However, should Yummy Bakes experience a windfall and their revenue exceeds AED 3 million in 2024, they would no longer be eligible for this relief from that tax period onwards.
Additional Conditions for Small Business Relief
While the relief offers considerable tax advantages, it comes with specific conditions. A resident business should neither be part of a Multinational Enterprises Group (whose consolidated annual turnover is over AED 3.15 Billion) nor a Qualifying Free Zone Person to be eligible for this relief.
Continuing with our example, if Yummy Bakes operates as an independent business and isn’t part of any multinational group or located in a qualifying free zone, it qualifies for the Small Business Relief.
Limitations on Tax Losses and Interest Expenditure Relief
Businesses that apply for the Small Business Relief need to be aware of the stipulations related to tax losses and net interest expenditure. Such businesses can’t carry forward any tax losses or net interest expenditure incurred during the relief period to future tax periods. These amounts can only be carried forward to periods where the Small Business Relief isn’t in effect.
For instance, if Yummy Bakes experiences a tax loss in 2024, a year when they’re using the relief, they can’t carry this loss forward to the next tax period.
Prevention of Artificial Separation of Business
The Ministerial Decision also includes a safeguard against businesses artificially splitting their operations to fall within the revenue threshold. If any business does this to avail of the Small Business Relief, it’s considered a contrivance to gain a Corporate Tax advantage, which isn’t permissible.
For example, if the owner of Yummy Bakes splits the company into “Yummy Bakes Cafe” and “Yummy Bakes Bakery” to fall under the threshold, and the authorities find this separation was conducted to avail of the Small Business Relief, it would be considered a scheme for Corporate Tax advantage.
Ministerial Decision No. 73 of 2023, effective 15 days after its publication on 03/04/2023, is a strategic measure to support small businesses in the UAE by offering them the option to pay zero taxes under specified conditions. As always, it’s essential for businesses to seek professional advice to fully understand and adhere to the terms of such legal provisions.
Disclaimer: The content provided on this blog is intended for informational purposes only. It is not intended to provide tax, legal, or financial advice, and should not be relied upon as a substitute for professional advice. Tax laws and regulations are complex and subject to change. The information herein is based on the UAE Corporate Tax Law as of 2023, and may not reflect the most current legal developments, treatments, or considerations. Always consult with a qualified professional or your own independent legal and tax advisors before making any decisions that could have legal or tax implications. The authors, contributors, publishers, and host of this blog are not responsible for any errors or omissions, or for actions taken in reliance on the information provided on this blog.