The Federal Tax Authority (FTA) recently issued a detailed Corporate Tax Guide on Small Business Relief (SBR). The summary of the same is captured below:

Who is eligible and what are the eligibility conditions?

  • Any taxable resident person with revenue below or equal to AED 3 million in a fiscal year and in a previous fiscal year.
  • SBR will be available for the tax period beginning on or after 1 June 2023 and will end by tax period ending by 31 December 2026.

Who is not eligible?

  • Permanent Establishment (PE) of Foreign Company in UAE (e.g. Branch).
  • Entity, which is part of an MNE, has a group turnover of more than AED 3.15 billion and is required to prepare Country-by-Country Report (CbCR).
  • Qualifying Free Zone Peron.

What are the SBR under Corporate Tax Law?

  • Entity electing for SBR will not be required to calculate taxable income and pay Corporate Taxes.
  • It will only have to file a simplified tax return. Relief from filing a full-fledged tax return has been provided.
  • It can prepare its Financial Statements using a cash basis of accounting.
  • Transfer Pricing Documentation rules will not apply for the tax period in which the entity claims SBR.

How does SBR work?

  • An eligible small business must have to make elect SBR within their tax return. It is clarified that once the return is submitted without the election of SBR, it would not be possible to claim this benefit at a later stage.

Impact of the SBR on other Corporate Tax Rules

  • Tax Losses

    Tax losses incurred during the period of the SBR claim would not be allowed to accrue, utilize or transfer to any other taxable person. However, tax losses incurred during the previous tax period would be allowed to be carried forward.

  • Interest Deduction

    The interest limitation rule shall not apply to the entity claiming SBR. This would mean that businesses claiming SBR would not be able to accrue interest expenses for tax purposes and carry forward the unutilized interest for future periods. However, the unutilized interest of the previous tax period would be allowed to be carried forward for future year set-off.

  • Interaction between Exempt Income and SBR

    The rules on Exempt Income do not apply to businesses that have elected for SBR. This means that all income, even if it is not taxable, must be included when a Resident Person calculates their revenue for SBR purposes.

  • Relief on Transfer of Assets and Liability and Business Restructuring

    These reliefs are not available to businesses in the tax periods for which they elect for SBR. SBR works by treating Businesses as if they had no Taxable Income. Therefore, the amount for which the transaction is treated as having taken place will not impact the tax position.

  • Rules for Expense Deduction

    Deductible expenditure rules do not apply to those who elect for SBR.

  • Participation Exemption for owners of UAE entity which elect for SBR

    Entity that elects for SBR will effectively not have a Corporate Tax liability. However, they are still considered to be subject to Corporate Tax. Accordingly, Persons who hold a Participating Interest in an entity that elects for SBR would be able to benefit from the Participation Exemption relief, subject to meeting the relevant conditions. This would apply to dividends, capital gains and other income.

  • Tax Group and SBR

    A tax Group would be able to elect for SBR if the total revenue of the tax group is equal to or below AED 3,000,000. As a single Taxable Person, the revenue threshold for SBR will apply to the Tax Group as a whole rather than to each member of the Tax Group.

Compliance Obligations, record-keeping requirements and administration for SBR

  • In order to claim SBR, a taxable person will have to register themself for corporate tax and elect for SBR through filing the tax return. An election will have to be made each year.
  • Taxpayers opting for SBR would be required to file a tax return. However, they would have a simplified return with reduced information to be provided.
  • The taxpayers opting for SBR would be required to maintain documentation that confirms that they are not breaching the revenue threshold prescribed for SBR (i.e. AED 3 million). The guideline provides the following set of examples for the documentation (though there is no fixed set of documents prescribed to be maintained)
    • Bank Statement;
    • Sales Ledgers;
    • Invoices and other records of daily earnings such as till rolls;
    • Order records and delivery notes; and
    • Other relevant business correspondence.
  • Similar to other businesses, an entity claiming SBR benefit is required to keep records and documents for seven years following the end of the tax period for which they relate.

Artificial Separation

If the FTA determines that an entity has artificially separated its activities and its overall revenue exceeds AED 3 million for the relevant Tax Period, then it will not be eligible for SBR. The entity will have to repay any Corporate Tax it would have owed if the business had not been artificially separated for the separate entities to elect for SBR. A penalty may also be imposed on the entity.

Our Comments

This detailed document issued by the FTA provides much-needed clarification on the claiming of SBR, and this guide would be handy for taxpayers looking at claiming SBR.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.