The introduction of corporate tax in the UAE on June 1, 2023, has ushered in a significant change to the country’s business landscape. While the UAE continues to be an attractive destination for businesses due to its competitive tax rates and investor-friendly environment, small businesses need to understand the corporate tax obligations to ensure compliance and avoid penalties.

Key Features of the UAE Corporate Tax System

The UAE's corporate tax system applies to businesses across all sectors, including small and medium enterprises (SMEs). Here are the key aspects of the system:

• Applicable Tax Rates: Small businesses benefit from a 0% tax rate on taxable income up to AED 375,000. Any taxable income exceeding this threshold is taxed at 9%.
• Tax Base: The tax is applied to the net profits of a business. Net profits are calculated by deducting allowable expenses from the company’s revenue.
• Scope: Corporate tax applies to all businesses, including SMEs, unless specifically exempted. Free zone businesses are subject to tax on mainland-derived income, but they can benefit from a 0% tax rate on qualifying income from their free zone operations.
• Exemptions: Income from natural resource extraction, certain government entities, and dividends or capital gains from qualifying shareholdings are exempt from tax.

Small Business Tax Relief (SBR)

To assist small businesses and startups, the UAE government introduced Small Business Relief (SBR).

• Eligibility: Small businesses with annual revenue below AED 3 million can benefit from this relief. The relief applies to tax periods starting from June 1, 2023, and ending before or on December 31, 2026.
• Benefits: Small businesses eligible for SBR are treated as having no taxable income, simplifying the compliance process. This reduces the cost and effort involved in tax filing, helping businesses focus on growth and operations.

Corporate Tax Registration Requirements

Regardless of size, all businesses in the UAE must adhere to corporate tax registration requirements:

• Register for Corporate Tax: All businesses, including small ones, must register for corporate tax with the Federal Tax Authority (FTA), unless exempt.
• Obtain a Tax Registration Number (TRN): After registering, the FTA assigns a unique TRN to the business.
• File Annual Tax Returns: Even if your business qualifies for the 0% tax rate or Small Business Relief, you are still required to file annual tax returns. These returns must include your financial statements and supporting documents.

Allowable Deductions and Expenses

Small businesses can deduct various expenses to calculate their taxable income. These expenses must be:

• Wholly and Exclusively for Business Purposes: Expenses that are directly related to business operations can be deducted.
• Not Capital in Nature: Expenses related to fixed assets, like purchasing property or equipment, cannot be deducted.

Some common allowable deductions include:

• Employee salaries and benefits
• Rent, utilities, and office expenses
• Depreciation of assets
• Professional fees (such as legal and accounting services)

Corporate Tax Compliance Timeline

• Tax Period: The corporate tax period follows the business’s financial year, typically from January 1 to December 31.
• Filing Deadline: Tax returns must be filed within 9 months from the end of the financial year. For example, if your financial year ends on December 31, your tax return must be filed by September 30 of the following year.

Impact on Free Zone Businesses

Free zone businesses need to carefully evaluate their income streams:

• Mainland-derived Income: Income derived from mainland operations is subject to a 9% tax rate.
• Qualifying Income: Income generated within the free zone that meets the FTA’s requirements can benefit from the 0% tax rate.

Penalties for Non-Compliance

Failing to comply with corporate tax requirements can lead to significant penalties, including:

• Fines: For late registration, filing, or tax payments.
• Suspension of Licenses: Repeated non-compliance could result in the suspension of the company’s trade license, affecting business operations.

Steps to Ensure Compliance for Small Businesses

To ensure smooth tax compliance, small businesses should:

• Understand Tax Obligations: Familiarize yourself with your tax obligations, including whether you qualify for Small Business Relief.
• Maintain Accurate Records: Keep detailed financial records, including invoices, contracts, and receipts, to support tax filings.
• Engage Professional Services: Hire a tax consultant or accountant to manage tax compliance and ensure accurate filings.
• Monitor Revenue Levels: Regularly track your revenue to determine when you may exceed the AED 375,000 threshold or AED 3 million cap for Small Business Relief.

‍

Conclusion

The UAE’s corporate tax system provides a balanced approach to supporting small businesses while ensuring compliance with tax regulations. Small businesses can benefit from the Small Business Relief program, which simplifies tax filing and reduces costs. By staying informed about tax requirements, maintaining accurate financial records, and seeking professional assistance, businesses can successfully navigate the new corporate tax framework and continue thriving in the UAE’s business-friendly environment.