On the 31st of January, 2023, the Ministry of Finance (MoF) promulgated Cabinet Decision 116 of 2022 concerning the Applicable Taxable Income Threshold for Corporate Tax, subsequent to the introduction of the Federal Decree Law on the Taxation of Corporations and Businesses (the “Corporate Tax Law”) in December 2022[1]. The United Arab Emirates (UAE) will inaugurate the federal corporate tax for financial years commencing on or post the 1st of June, 2023.
The UAE’s Ministry of Finance has bolstered the minimal threshold for corporate tax from $100,000 (AED375,000) to $816,000 (AED3 million) for diminutive and micro enterprises, nascent ventures, and freelancers. The Small Business Relief Law aims to buttress fledgling establishments and other small or micro businesses by alleviating their corporate tax onus. This legislation shall be implemented at the outset of June 2023 and perdure until the terminus of December 2026.
Ministerial Decision No. 73 of 2023 on Small Business Relief has been promulgated for the objectives of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (Corporate Tax Law). According to Article 21 of the Corporate Tax Law, a taxable person is considered as not having derived any taxable income in a given tax period where the revenue did not surpass a certain threshold.
Small Business Relief strives to bolster nascent ventures and other diminutive or micro-enterprises by mitigating their Corporate Tax encumbrance and compliance expenditures. The Ministerial Decision on Small Business Relief delineates the revenue threshold and stipulations for a taxable person to elect for Small Business Relief and elucidates the provisions of the carried forward Tax Losses and disallowed Net Interest Expenditure under the Small Business Relief scheme.
The Ministerial Decision on Small Business Relief prescribes the following:
- Taxable persons who are resident persons can claim Small Business Relief where their revenue in the relevant and previous tax periods is below AED3 million for each tax period. This signifies that once a taxable person surpasses the AED3 million revenue threshold in any tax period, the Small Business Relief will no longer be accessible.
- The AED3 million revenue threshold will be applicable to tax periods commencing on or after 1st June 2023 and will solely continue to apply to subsequent tax periods that culminate before or on 31st December 2026.
- Revenue can be ascertained based on the pertinent accounting standards accepted in the UAE.
- Small Business Relief will not be accessible to Qualifying Free Zone Persons or members of Multinational Enterprises Groups (MNE Groups) as defined in Cabinet Decision No. 44 of 2020 on Organising Reports Submitted by Multinational Companies. MNE Groups are conglomerates of companies with operations in more than one country that have consolidated group revenues of more than AED3.15 billion.
- In tax periods defined in the decision where businesses do not elect to apply for Small Business Relief, they will be able to carry forward any incurred Tax Losses and any disallowed Net Interest Expenditure from such tax periods, for use in future tax periods in which the Small Business Relief is not elected.
- Concerning the artificial separation of business, the Ministerial Decision specifies that where the Federal Tax Authority (FTA) establishes that taxable persons have artificially separated their business or business activity, and the total revenue of the entire business or business activity surpasses AED3 million in any tax period, and such persons have elected to apply for Small Business Relief, this would be considered an arrangement to obtain a Corporate Tax advantage under Clause (1) of Article 50 regarding the general anti-abuse rules of the Corporate Tax Law.
In summary, the UAE’s Ministry of Finance has enacted the Small Business Relief Law with the objective of supporting small and micro businesses, startups, and freelancers by diminishing their corporate tax burden. The law raises the minimum threshold for corporate tax to AED3 million and will be in effect from June 2023 until December 2026. The Ministerial Decision on Small Business Relief outlines the conditions and thresholds for electing Small Business Relief and clarifies the provisions regarding carried forward Tax Losses and disallowed Net Interest Expenditure within the Small Business Relief framework.
