Corporate tax rates under the Corporate Tax Law
The Corporate Tax Law will apply to both onshore and free zone companies. Corporate tax rates will be 0% on taxable income up to AED 375,000 and 9% on taxable income over AED 375,000.
Free zone entities that maintain adequate substance in the UAE and comply with transfer pricing rules (and document such compliance) and do not select to be subject to full corporate tax rates will be subject to corporate rates of 0% on ”Qualifying Income” and 9% on other taxable income. None of the Corporate Tax Law, the implementing regulations or the Ministerial Decision clarifies how qualifying income will be calculated. Accordingly, we are still awaiting further clarity on what will be considered Qualifying Income.
Purpose of small business tax relief
The aim behind small business relief is to support small businesses that provide goods and services and operate within the UAE. Reducing the corporate tax imposed on small businesses that qualify for the relief, and in turn reducing the costs associated with compliance with the new laws, will allow such businesses to continue to thrive.
Eligibility and thresholds
Businesses and individuals that generate annual revenues of up to AED 3 million will be eligible to benefit from the relief. The relief will be available for financial years beginning on or after 1 June 2023 but only until 31 December 2026. If the business’s revenue exceeded AED 3 million in a prior tax period, then small business relief will not be available.
In addition to meeting the above-mentioned threshold, other conditions must be fulfilled in order to be eligible for small business relief. Notably, small business relief is solely available to UAE entities which are “Resident Persons” which do not form part of multinational enterprise group and are not free zone entities which qualify for the reduced rate of tax referred to above.
Businesses that are eligible but do not elect to apply for small business relief will have the option to carry forward incurred tax losses and disallowed net interest expenditure from tax periods that would have been eligible for small business relief.
Resident Persons
A Resident Person is any of the following:
a) A juridical person that is incorporated or otherwise established in, or recognised under, the applicable legislation of, the UAE, including a free zone
b) A juridical person that is incorporated or otherwise established in, or recognised under the applicable legislation of, a foreign jurisdiction but managed and controlled in the UAE
c) A natural person who carries out business activities in the UAE
d) Any other person as may be determined by a decision of the Cabinet or Finance Minister
Conclusion
If your business is a mainland business or incorporated in the UAE or if you are a person that operates a business in the UAE, you may be eligible for small business relief, provided that your revenue in the relevant tax period does not exceed AED 3 million.
As UAE’s corporate tax regime are still new, we look forward to seeing additional decisions clarifying the provisions of the Corporate Tax Law, such as those relating to qualifying income.
If you have any questions regarding the UAE corporate tax regime or its application to your business, please get in touch with your usual Reed Smith contact or one of the authors. We would be happy to assist you in determining whether corporate tax will apply to your business and what the next steps are to ensuring compliance.
Client Alert 2023-107
