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The UAE is not the tax-free haven it once was. Last year it began applying a 9 percent corporate tax on net profits. And before that, in 2018, it introduced a 5 percent value added tax (VAT).
Luckily the new corporate tax is relatively low by global and regional standards. It’s meant to strike a careful balance – a way to diversify government revenues away from oil while maintaining the country’s reputation as a competitive business environment.
But while taxes are becoming a reality in the UAE, there’s an important disclaimer. The country wants SMEs to form the backbone of its future economy. Because of that, the new corporate tax also includes measures to ease the tax burden for small businesses. The goal is to make sure small businesses with less revenue can continue to scale up without taxes impeding their growth.
Check out our guide on UAE lending initiatives for SMEs.
As is always the case with taxes, things can get tricky fast. Below we’ve highlighted the major tax incentives and benefits available to SMEs operating in the UAE.
To ensure that SME growth is not affected by the new corporate tax, the government has rolled out what’s called the Small Business Relief (SBR). The program is a major boon to small businesses, potentially exempting them from all tax liability on their profits.
The key benefits are:
An exemption from tax liabilities on income earned during the tax period
Reduced compliance requirements. That includes a streamlined tax return and simplified transfer pricing rules.
In order to qualify for relief, your business must meet the following criteria:
It must be a resident person in the UAE. That means it’s an entity incorporated in the UAE or a foreign entity that is “effectively managed and controlled” within the UAE.
Revenues cannot exceed AED 3,000,000 ($816,904) during the relevant tax period and for all tax periods ending on or before December 31, 2026.
The above revenue threshold is applicable on or after 1 June 2023.
It cannot operate as a financial institution or a holding company.
Small Business Relief must be elected on the tax return.
The relief can be claimed for multiple consecutive tax periods if eligibility criteria is met.
There are a few important caveats in the relief program. You cannot get relief if:
You intentionally separate a business solely to meet the AED 3,000,000 threshold.
Your company is part of a multinational enterprise group with consolidated group revenue exceeding AED 3.15 billion.
You’re an entity already qualifying for a 0 percent corporate tax rate on qualifying income within a free zone.
Another great option is to establish your SME in one of the country’s over 45 free zones. You’ll get relief from import and export duties, sharply cutting the cost of trade. In free zones you can own your company entirely as a foreigner. Starting a free zone company can be done remotely and will give you access to world-class facilities.
Before the new corporate tax was imposed, free zones were also tax free. Today free zones offer a 0 percent tax rate on certain qualifying activities.You can see a full list of activities here.
The 5 percent value-added tax applies to a wide range of categories. Everything from entertainment, electronics and hotel services to food and beverages and transportation are taxed. According to the law, businesses with taxable supplies and imports that exceed AED 375,000 per year must register with the tax authority and submit a VAT return.
However, businesses that are registered for VAT can apply for refunds for eligible business expenses like travel, entertainment and office supplies. If you engage in these activities frequently, that can add up to a lot of savings.
Filing taxes is inherently confusing, even for long established businesses. To make things a bit easier, SMEs have access to the Muwafaq Package initiative, which includes discounted rates on tax accounting software, appointments with tax specialists and workshops on tax procedures tailored for SMEs.
The great news is that the UAE is still relatively undertaxed compared to most jurisdictions. There is still no income tax, inheritance tax, or withholding tax. There’s also no restrictions on repatriation of profits abroad.
It doesn’t matter how much you earn from your personal investments, whether stocks or otherwise, your private income is tax-free if you hold a UAE residence visa and do not have an official residence outside of the UAE.
Check out our guide on Strategies for tax-efficient investing.
References:
UAE begins corporate tax roll-out, with free zones exempted
United Arab Emirates Corporate Tax credits and incentives
WellTax Small Business Relief in the UAE
Small Business Tax Relief Under UAE CT
Disclamer:
This post is for educational purposes only, and the Firm does not directly or indirectly provide these services.
