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According to Ministerial Decision No. 73 of 2023, the UAE Ministry of Finance announced the implementation of corporate tax relief for small and micro enterprises in early April 2023. The ministerial decision will come into force on 1 June 2023.
The ministerial decision further clarified Federal Decree No. 47 of 2022 on Taxation of Companies and Businesses (Corporate Tax Law), which will also come into force on 1 June 2023.
Corporate Tax Rates under the Corporation Tax Act
The corporate tax laws will apply to both onshore companies and free zone companies. The tax rate is 0% for companies with taxable income up to AED 375,000 and 9% for companies with taxable income in excess of AED 375,000.
Free zone entities that maintain sufficient substance in the UAE and comply with the transfer pricing rules (and document such compliance) and do not elect to pay the full corporate tax rate will be subject to the corporate tax rate of 0% on “qualifying income” and 9% on other taxable income percentage. Neither the corporate tax law, implementing regulations nor ministerial decisions spell out how qualifying income is calculated. Therefore, we are still awaiting further clarity on what will be considered qualifying income.
Purpose of the small business tax cut
The purpose of the Small Business Relief is to support small businesses that provide goods and services and operate within the UAE. Reducing corporate taxes on small businesses that qualify for the relief, thereby reducing the costs associated with complying with the new law, will allow these businesses to continue to thrive.
Qualifications and thresholds
Businesses and individuals with an annual revenue of up to Dh3 million will be eligible to benefit from the relief. The relief applies to fiscal years beginning on or after June 1, 2023, but only to December 31, 2026. The small business relief will not apply if the business’s revenue in the previous tax period exceeds AED 3 million.
In addition to meeting the thresholds above, other criteria must be met to be eligible for small business relief. It is worth noting that the small business relief is only available to UAE entities that are not “residents” of multinational corporate groups, nor are free zone entities eligible for the aforementioned reduced rates.
Businesses that qualify but do not choose to claim the small business credit may choose to carry forward tax losses and disallowed net interest expenses incurred during tax periods that would otherwise qualify for the small business credit.
Residents
A resident is any of the following:
a) A legal entity incorporated or otherwise established or recognized under the applicable laws of the UAE (including free zones)
b) A legal entity incorporated or otherwise established in a foreign jurisdiction, or recognized under applicable law but managed and controlled in the UAE
c) Natural persons carrying out business activities in the UAE
d) any other person as determined by decision of the Cabinet or the Minister of Finance
in conclusion
If your business is a mainland business or incorporated in the UAE, or if you are a person operating a business in the UAE, you may be eligible for the small business relief provided your income does not exceed AED 3 million in the relevant tax period .
As the corporate tax regime in the UAE is still new, we expect to see more decisions to clarify the provisions of corporate tax law, such as those related to qualifying income.
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