Introduction
Small Business Relief is intended to support start-ups and other small or micro businesses by reducing their Corporate Tax burden and compliance costs. The Ministerial Decision on Small Business Relief specifies the revenue threshold and conditions for a taxable person to elect for Small Business Relief and clarifies the provisions of the carried forward Tax Losses and disallowed Net Interest Expenditure under the Small Business Relief scheme.
The Ministry of Finance has issued Ministerial Decision No. 73 of 2023 dated 06th April 2023 on Small Business Relief for Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (the “Corporate Tax Law”).
The provisions related to Small Business Relief are contained under Article 21 of Federal Decree-Law No. 47 of 2022 read with Ministerial Decision No. 73 of 2023.
What does the Law Say?
The decision is issued in accordance with Article 21 of the Corporate Tax Law, which deals with Small Business Relief. The relevant provisions of Article 21 are reproduced below:
“Article 21 (Small Business Relief)
1. A Taxable Person that is a Resident Person may elect to be treated as not having derived any Taxable Income for a Tax Period where:
a) the Revenue of the Taxable Person for the relevant Tax Period and previous Tax Periods does not exceed a threshold to be set by the Minister; and
b) the Taxable Person meets all other conditions prescribed by the Minister.
2. Where Clause 1 of this Article applies to a Taxable Person, the following provisions of this Decree-Law shall not apply:
a) Exempt Income.
b) Reliefs.
c) Deductions.
d) Tax Loss relief.
e) Transfer Pricing Documentation.”
1. Article 21 clearly states that Taxable Resident Person will have the option to be treated as Small Business. A Taxable Resident Person may elect whether it will claim the relief provided to small business provided all other conditions for such relief are met.
2. If a taxable resident person opts for the relief provided under Article 21 of the corporate tax law, then the provisions of Exempt Income, Reliefs, Deductions, and Tax Loss Relief shall not apply. Further, it will not be required to maintain transfer pricing documentation.
3. The threshold limit of revenue as prescribed by the MOF is required to be met in the current year as well as each of the previous tax periods separately.
What does the Ministerial Decision Say?
1. Revenue Threshold
i. Taxable persons that are residents can claim Small Business Relief where their revenue in the relevant tax period and previous tax periods is below AED 3 million for each tax period.
ii. This means that once a taxable person exceeds the AED3 million revenue threshold in any tax period (current period as well as in any previous tax period), then the Small Business Relief will no longer be available.
iii. If a taxable resident person has an income which exceeds AED 375,000 and the revenue of such person is below AED 3,000,000; then it is wise for that person to choose to be treated as Small Business and then its taxable income will be presumed to be NIL. Since Article 3 of Decree-Law provides that tax shall be payable if the income of a taxable person exceeds AED 375,000.
iv. A safety net of revenue of AED 3,000,000 and income of AED 375,000 is available for the taxable person to save the Corporate Tax.
2. Tax Period
i. The AED 3 million revenue threshold will apply to tax periods starting on or after 1 June 2023 and will only continue to apply to subsequent tax periods that end before or on 31 December 2026.
ii. This para provides that a revenue threshold of AED 3 million shall be applicable on the tax periods that begin on 1st June 2023 and end on 31st December 2026 which means that for a taxable person to claim relief under Article 21, the revenue of such taxable resident person shall not exceed AED 3 million for all the tax periods that fall between 1st June 2023 and 31st December 2026. If the revenue threshold crosses in one tax period, then the relief under Article 21 shall not be available in that tax period or any other subsequent tax period(s).
3. Revenue Calculation:
i. Revenue can be determined based on the applicable accounting standards accepted in the UAE.
ii. Previously, there was no established standard for firms in the UAE, but the government now advises using IFRS for all jobs and operations including accounting.
iii. Further, as required by the Central Bank of the UAE, businesses must adhere to accounting principles in Dubai – IFRS, according to the Securities and Commodities Authority (SCA). As a result, all companies listed on the Dubai Financial Market (DFM), NASDAQ Dubai (formerly DIFX), or Abu Dhabi Securities Exchange (ADX) are required to keep their financial records up to date in accordance with IFRS. All legally listed companies on the Abu Dhabi Securities Exchange must submit their IFRS financial statements to the concerned authorities.
4. Persons not eligible for the relief
i. Small Business Relief will not be available 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.
ii. MNE Groups are groups of companies with operations in more than one country that have consolidated group revenues of more than AED 3.15 billion.
5. Carry Forward of Tax Losses and Disallowed Interest Expenditure
i. 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.
ii. If a taxable resident person does not elect to be treated as a small business, then the option of carrying forward of tax losses or net interest expenditure will be available.
iii. For Instance, in any tax period, say, 2024, a taxable person has revenue of AED 1 million and tax loss of AED 200,000 and a disallowed net interest expenditure of AED 50,000. So, if it decides to elect to be treated as Small Business, then a tax loss of AED 200,000 and net interest expenditure of AED 50,000 shall not be carried forward and will lapse.
6. Application of Anti fragmentation rule
i. If a taxable person has artificially separated their business or business activity and the total revenue of the entire business or business activity exceeds AED 3 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 i.e. the general anti-abuse rules of the Corporate Tax Law.
ii. Further, such artificial fragmentation needs to be disregarded for corporate tax purposes.
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Author: CA. Bharat Bhutani: cabharatbhutani15@gmail.com
CA. Rishabh Agarwal (LLM- International Tax-Vienna)
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