The standard rate of corporate tax in the UAE is 9%. However, it only applies to annual taxable income exceeding AED 375,000. The UAE has, however, taken measures to ensure that it remains attractive for businesses from across the globe. One of these measures is the reliefs under the corporate tax laws. In this blog, we are discussing reliefs that are available under the corporate tax law, Federal Decree-Law No. 47 of 2022.
Reliefs under the Corporate Tax UAE
Tax relief reduces the tax burden for individuals and businesses. Therefore, this topic interests everyone.
Tax Slabs: Built-in Tax Relief?
The corporate tax rate is 9%, while it is 0% for businesses that have a taxable income of up to AED 375,000. So, there is a built-in tax relief that every small business can benefit from. In simple terms, there is no corporate tax for businesses that earn less than AED 375,000 in a tax year. Effectively, there is relief for small businesses or businesses that earn lower profits. Let’s discuss them one by one.
Small Business Relief
The corporate tax law and the subsequent Ministerial Decision No. 73 of 2023 provide complete information on Small Business Relief (SBR). SBR provides relief, especially to small businesses. In simple words, a business may not be liable to pay corporate taxes if its revenue falls below a certain threshold. Let’s highlight the criteria and relief provided under the SBR.
The corporate tax law and the Ministerial Decision dictate the following points for SBR:
- To qualify for Small Business Relief (SBR), the resident taxable person’s revenue should not exceed AED 3 million in the current tax year or in any preceding tax year. If your income goes above AED 3 million in any of the tax periods, you can’t claim SBR.
- The AED 3 million income limit applies from June 1, 2023, to December 31, 2026. This means that businesses can apply for SBR for tax periods that start on or after June 1, 2023, and end on or before December 31, 2026.
- You can calculate your revenue based on the accounting standards set in the UAE.
- SBR does not apply to Qualifying Free Zone Persons (QFZPs), and large multinational companies that operate in multiple countries with revenue of more than AED 3.15 billion.
- If a business decides not to use SBR for a particular year, it can carry forward any tax losses and disallowed interest expenses to future years when they don’t use SBR.
- According to the Ministerial Decision, if the tax Authority discovers that a taxpayer is trying to separate their business artificially to claim SBR while their income is actually over AED 3 million, this will be seen as an attempt to gain an unfair tax advantage under the tax law.
Tax Loss Relief
A tax loss occurs when allowable expenses or deductions exceed the revenue of the business in a tax period. According to Article 37 of the tax law, if a business experiences a tax loss in one tax period, it can offset that loss against the taxable income of future periods. This helps businesses lower their taxable income and, as a result, reduce their tax bill. However, it’s important to keep in mind that a business can only use this method to offset up to 75% of its taxable income in any subsequent tax period before considering the effect of the loss.
When carrying forward a tax loss to a later tax period, it can only be used to offset taxes in that specific period. If there is still some unused tax loss remaining, the business can continue to carry it forward to the next subsequent period.
It is worth noting that tax loss relief is not available for losses incurred before the corporate tax regime. Furthermore, tax loss relief is also unavailable for losses incurred prior to the business becoming a taxable person as per the corporate tax law. When the loss relates to an asset or activity that is exempt under the corporate tax law, there is no tax loss relief available.
As per Article 38 of the tax law, a taxable person can transfer their tax losses to another taxable person. However, there are conditions for the transfer of tax losses. It’s important to note that any tax losses transferred under Article 38 of the tax law must be used before the carry-forward tax losses are applied.
Transfer of Assets and Liabilities within a Qualifying Group
As per Article 26 of the corporate tax law, when assets and liabilities are transferred between companies within the same qualifying group, it will not have any impact on their taxable income.
To qualify as a member of a qualifying group, taxable persons must meet the following conditions:
a) The taxable person must have a permanent establishment in the State.
b) There should be at least 75% ownership, either directly or indirectly, of one taxable person in another taxable person. If a third party holds this ownership, they must have at least 75% ownership in each of the taxable persons.
c) None of the taxable persons are exempt persons or a QFZP.
d) The financial year-end date must be the same for all taxable persons.
e) All taxable persons must use consistent accounting standards in their financial statements.
Business Restructuring Relief
Business Restructuring Relief is available for businesses or companies that undergo corporate reorganization, or, in other words, restructuring. As mentioned in Article 27 of the corporate tax law, when a taxable entity transfers its whole business or a distinct portion of its business to another taxable entity, or a prospective one, and receives shares or other ownership interests in return, there is no gain or loss for the purposes of taxable income. Additionally, if one or more taxable entities transfer their entire business or an independent portion of their business to another taxable entity, or a prospective one, in exchange for shares or other ownership interests and subsequently cease to exist as separate entities following the transfer, no gain or loss is factored into the determination of taxable income. In other words, when the transferor(s) no longer exist as distinct entities after the transfer, the tax treatment remains unaffected.
Let’s move on to the conditions of Business Restructuring Relief. To qualify for relief, the taxable persons must satisfy the following conditions:
a) The transfer should be according to the applicable laws of the State.
b) The taxable persons should have a permanent establishment in the State.
c) None of the taxable persons should be an exempt person or a QFZP.
d) All taxable persons should follow the same financial year-end date.
e) All taxable persons should use consistent and uniform accounting standards.
f) The transfer should depict economic reality.
Other Reliefs
There are several other reliefs as per the corporate tax law in the UAE. For instance, a Qualifying Free Zone Person may be subject to 0% corporate tax if they meet certain conditions. Furthermore, there is a relief, foreign tax credit, available for companies that pay taxes overseas. However, there are conditions that the companies must satisfy to avail themselves of the relief. The key here is to keep oneself updated on tax laws and take full advantage of tax relief.
Conclusion
The UAE has always been an attractive center for the global business community. This is mainly due to low taxes and a favorable business environment. Even though the standard rate of corporate tax is still low (9%), there are reliefs available to ensure that businesses thrive in the UAE.
Small Business Relief targets small businesses with revenue of less than AED 3 million in a tax period. There is tax relief for businesses that suffer losses in the form of tax loss relief. Tax loss relief allows businesses to offset tax losses against future taxable incomes. There are reliefs available for group companies, too. For instance, when assets and liabilities transfer within a qualifying group, they do not impact the taxable income. Business Restructuring Relief is available for companies that undertake corporate restructuring and reorganization. It results in no gain or loss for the purpose of taxable income. Apart from these reliefs, there are various other reliefs available as per the UAE corporate tax law. Note that relief comes with conditions; therefore, it is beneficial to connect with a professional.
Creative Zone Tax & Accounting
The new corporate tax regime brings new taxes as well as reliefs for businesses. Therefore, there is a need to remain updated with the tax laws and regulations. We recommend you focus on your core business and leave the rest to us. Give us a call or send us a message for a tailored consultation. Contact us now.
