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Corporate Tax is essentially a tax that applies to a company’s profits. These profits are calculated after considering all the allowable expenses in line with a country’s tax laws. In the UAE, the topic of corporate tax has become a matter of discussion since the implementation of a new law known as Federal Decree-Law No. 47 of 2022. According to this law, starting from June 1, 2023, businesses will be subjected to a corporate tax (CT) of 9%. However, businesses with annual profits below AED 375,000 will enjoy a 0% corporate tax rate. As a result, the impact of corporate tax on small and medium enterprises (SMEs) is expected to be minimal. Additionally, the UAE government has recently introduced Small Business Relief (SBR) to support small businesses and startups, creating a more favorable business environment for SMEs.
Corporate tax’s impact on SMEs can be both positive and negative. SMEs play a pivotal role in the UAE’s economy, contributing significantly to its growth. Therefore, the introduction of corporate tax can have varying effects on these enterprises.
On the positive side, the revenue generated from corporate tax can be used by the government to improve the business environment for SMEs. This could involve funding infrastructure development or providing grants and subsidies to facilitate the growth and development of SMEs.
Conversely, SMEs may experience higher compliance and administrative costs due to corporate tax, potentially leading to reduced profitability and competitiveness. Since SMEs typically have limited financial resources, corporate tax may impact their cash flow and hinder their ability to expand or invest in new technology and human resources. However, it’s important to note that the 9% corporate tax rate only applies to taxable profits exceeding AED 375,000, which limits its negative impact. Moreover, the introduction of SBR is expected to alleviate the financial burden on many small businesses.
Speaking of Small Business Relief (SBR), the Ministry of Finance has issued Ministerial Decision No. 73 of 2023 in line with the Corporate Tax Law (Federal Decree-Law No. 47 of 2022). This decision, in accordance with Article 21 of the Corporate Tax Law, states that individuals with earnings below a specific limit during a particular tax period will not be liable to pay any taxes. The primary aim of SBR is to ease the corporate tax burden and compliance expenses for small businesses, and the decision outlines the criteria for eligible individuals.
Key Points
1) SBR can only be claimed by resident taxable individuals whose revenue does not exceed AED 3 million in the relevant tax year and each of the preceding tax years. If revenue surpasses AED 3 million in any tax period, businesses are not eligible for SBR.
2) The AED 3 million revenue threshold is effective from June 1, 2023, to December 31, 2026. This means that businesses can claim SBR for tax periods commencing on or after June 1, 2023, and ending on or before December 31, 2026.
3) Revenue calculations are based on applicable accounting standards in the UAE.
4) SBR is not applicable to Qualifying Free Zone Persons or members of Multinational Enterprise Groups (MNE Groups) as defined in Cabinet Decision No. 44 of 2020. MNE groups are companies operating in multiple countries with revenue exceeding AED 3.15 billion.
5) Businesses not opting for SBR in specific tax periods can carry forward their tax losses and disallowed net interest expenditure to future taxable years without SBR.
6) The decision warns against any attempt to artificially separate businesses or business activities to claim SBR while exceeding the AED 3 million revenue limit, as it would be considered an attempt to gain a tax advantage under the Corporate Tax Law.
Summary
In summary, the introduction of corporate tax in the UAE brings both advantages and challenges for SMEs. While compliance and administrative costs may rise, the revenue from corporate tax can be used to enhance the business environment for SMEs through infrastructure development, grants, and subsidies. The introduction of Small Business Relief (SBR) is expected to alleviate the burden for many small, micro, and startup businesses, reducing corporate tax expenses. Overall, SMEs should remain informed and take advantage of available exemptions and relief measures, all while continuing to contribute to the growth of the UAE’s economy.
In conclusion, the impact of corporate tax on SMEs in the UAE varies, but the government’s efforts to provide support, combined with the country’s generally low tax environment, make it an attractive place for SMEs to establish and expand their businesses.
At Abacus TA, we specialize in serving SMEs and startups, tailoring our services to your specific needs. With available relief measures, why not seize the opportunity to boost your profits and invest in business growth? Our experts are here to assist with SBR and other tax-related matters. Whether it’s corporate tax or any other service, feel free to reach out to us for support at www.abacusta.ae/contact/