Corporate income tax is a levy impose by governments on the profits earn by companies. It is typically calculate based on a percentage of the company’s taxable income after accounting for allowable deductions and exemptions. The revenue generated through c income tax contributes to public funds and supports various government initiatives.
Due to the implementation of Federal Decree No. 47 of 2022, new legislation in the United Arab Emirates, there is an ongoing discussion regarding the concept of corporate income tax in UAE. As per this decree, effective from June 1, 2023, businesses are now require to fulfill their obligations by paying income tax. The standard corporate tax rate has set at 9%. However, it is essential to note that businesses will not be subject to any corporate tax on profits up to AED 375,000 per year. Consequently, the impact of corporate tax on SMEs (small and medium-sized enterprises) is expect to be minimal.
The Objective of Small Business Tax Relief
The purpose of small business tax relief is to provide assistance to small businesses operating within the UAE that offer goods and services. By reducing the corporate tax burden on qualifying small businesses, along with alleviating the costs associated with complying with new regulations, this relief aims to foster an environment where these businesses can flourish and sustain their operations.
The Impact of Corporate Income Tax in UAE on SMEs: Benefits and Drawbacks
The implementation of corporate tax can have both positive and negative consequences for small and medium-sized enterprises (SMEs). It is important to consider the benefits and drawbacks of corporate tax when assessing its effects on SMEs.
Benefits of Corporate Tax on SMEs
The revenue from corporate tax (CT) can create a favorable business environment for SMEs through:
- Infrastructure Development: CT revenue funds infrastructure projects for SMEs, including industrial zones, business parks, transportation networks, and digital infrastructure.
- Grants and Subsidies: CT revenue supports SME growth through grants and subsidies for research, market expansion, capacity building, and innovation.
This promotes SME success and enables them to overcome financial barriers, fostering a thriving business landscape.
Drawbacks of Corporate Income Tax in UAE on SMEs
The implementation of Corporate Tax (CT) may lead to increased compliance costs and administrative expenses for Small and Medium Enterprises (SMEs). As a result, their profitability may decline, impacting their competitive edge. Moreover, since SMEs often operate with limited funds, the imposition of CT can affect their cash flow, hindering their ability to expand their businesses and invest in new technology and human resources.
However, it’s essential to note that the 9% CT rate applies only to taxable profits exceeding AED 375,000, mitigating the adverse effects for many SMEs. Additionally, the introduction of the Small Business Relief (SBR) program can assist numerous small businesses in reducing their costs effectively.
Ministry of Finance Initiate Small Business Relief (SBR) in Compliance with Corporate Tax Law
In alignment with the Corporate Tax Law, Federal Decree-Law No. 47 of 2022, the Ministry of Finance has issued a new Ministerial Decision No. 73 of 2023. This decision, in accordance with Article 21 of the Corporate Tax Law, focuses on Small Business Relief (SBR).
SBR aims to alleviate corporate tax obligations and compliance costs for small businesses. As per the Ministerial Decision, taxable individuals are exempt from tax liabilities if their earnings remain below a specific threshold during a designated tax period. The main objective of SBR is to reduce the corporate tax burden and ease compliance expenses for small businesses.
The Ministerial Decision provides clear criteria outlining the eligibility requirements for taxable individuals to qualify for Small Business Relief. This initiative demonstrates the government’s commitment to supporting and facilitating the growth of small businesses by providing them with tax relief benefits.
The ministerial decision encompasses the following key points:
- SBR can be claim by resident taxable persons whose revenue does not exceed AED 3 million in the relevant tax year and preceding tax years.
- The implied period for the AED 3 million revenue threshold is June 1, 2023, to December 31, 2026.
- Revenue calculation should be based on applicable accounting standards in the UAE.
- SBR is not applicable to Qualifying Free Zone Persons and members of Multinational Enterprise Groups (MNE Groups) as defined in Cabinet Decision No. 44 of 2020.
- Losses and disallow net interest expenditures can be carry forward for taxable years where SBR is not elect.
- Artificially separating businesses to claim SBR while revenue exceeds AED 3 million will be consider a violation of the CT law.
Income tax services in Dubai
Dubai offers income tax services including tax registration, consultancy, return preparation, advisory, audits and compliance, and dispute resolution to individuals and businesses. These services,= provide expert guidance on tax matters, ensure tax compliance, assist with accurate filing, offer advisory support, conduct audits, and facilitate the resolution of tax disputes. Services include
- Tax Registration: Dubai provides tax registration services for individuals and businesses required to pay income tax, including obtaining tax identification numbers and necessary documentation.
- Tax Consultancy: Dubai offers expert guidance on income tax planning, optimization, and compliance through tax consultancy services for individuals and businesses.
- Tax Advisory: Dubai’s tax advisory services provide expert advice on income tax matters, including tax implications for business transactions, investments, acquisitions, and international tax issues.
Conclusion
The implementation of corporate tax (CT) may result in increased compliance and administrative costs for SMEs. However, the revenue generated from CT can be utilize to create a conducive business environment for SMEs through infrastructure development, grants, and subsidies. Moreover, the introduction of Small Business Relief (SBR) offers much-needed support by reducing the corporate tax burden and compliance expenses for small, micro, and startup businesses. It is crucial for SMEs to stay informed about available exemptions and relief measures while continuing to contribute to the growth of the UAE’s economy.