Eligible businesses are required to claim Small Business Relief during corporate tax filing in order to access the benefit.
Dubai: A UAE business with annual revenue of Dh2.9 million and profits of Dh2.5 million may still be eligible for Small Business Relief. However, the benefit could be missed if the business does not select the relief option when submitting its corporate tax return.
Mayank Sawhney, Managing Director at MaxGrowth Consulting and Board Member of the Tax Experts Club UAE, said many smaller businesses may not realize that Small Business Relief must be actively claimed, even if their revenue meets the eligibility criteria.
He made the remarks during the launch of the Tax Experts Club UAE in Dubai on Tuesday, where tax professionals discussed the planning opportunities available to businesses under the UAE’s corporate tax framework.
“You have to opt for that relief while filing your corporate tax return,” Sawhney said.
The relief was introduced to ease the corporate tax burden on businesses with annual revenue of up to Dh3 million. Sawhney noted that eligibility is not determined by profitability alone; businesses can qualify even with significant profits, provided they meet all required conditions.
Small businesses may overlook the option
Businesses that prepare their tax returns internally could miss out on the relief if their accountant or owners are not fully aware of the filing requirements.
“Somebody has to tell you. Maybe as a small and medium scale business owner, you might not even be aware of that,” Sawhney said.
He cited the example of a consultancy earning Dh2.9 million in revenue with a relatively low cost base of Dh400,000. The company could generate Dh2.5 million in profit and still qualify for the relief, provided it satisfies the eligibility requirements and selects the option when filing its corporate tax return.
Sawhney said businesses should continue to monitor their revenue during the relief period, as exceeding the Dh3 million threshold in a particular year could impact their eligibility in subsequent periods.
He also highlighted that businesses operating in qualifying free zones must meet more than just basic eligibility requirements. “Just having an entity in a qualifying free zone and doing the qualifying activities alone is not enough. You need to have economic substance, which means you need to have a sufficient number of employees commensurate with the size of your business. Your board of directors’ meetings should happen inside the free zone. Employees should be based inside the free zone,” he said.
Companies nearing the revenue threshold should review their position before the end of the financial year and seek professional advice on whether their current operating structure remains appropriate.
Sawhney added that any restructuring decisions should be driven by genuine commercial reasons and not undertaken solely for the purpose of reducing tax liability.
Free-zone status does not guarantee zero tax
Sawhney also cautioned that establishing a company in a qualifying free zone does not automatically entitle it to the zero per cent corporate tax rate.
Businesses must carry out eligible qualifying activities and demonstrate sufficient economic substance within the free zone where they operate.
“Just having an entity in a qualifying free zone and doing the qualifying activities alone is not enough,” he said.
The requirements may include maintaining an appropriate level of staffing, conducting board meetings within the free zone, and having office or warehouse facilities that are proportionate to the size and nature of the business.
A free-zone company generating significant revenue while operating only through a flexi-desk arrangement may find it difficult to demonstrate the required level of economic substance, especially if its employees and core operations are located elsewhere.
Sawhney noted that companies claiming the zero per cent corporate tax rate without satisfying the required conditions could face additional tax assessments and penalties if they are selected for an audit.
Businesses must also keep track of revenue earned from non-qualifying activities, as exceeding the allowed threshold could result in the loss of qualifying free-zone status for multiple years.
Tax groups may not suit every company
Businesses with multiple legal entities should carefully assess whether forming a corporate tax group would lower or increase their overall tax liability.
Each separate taxable entity can benefit from the zero per cent corporate tax rate on the first Dh375,000 of taxable income. However, when multiple companies are combined into a single tax group, this threshold applies to the group collectively rather than to each individual entity.
Sawhney said maintaining separate tax registrations may therefore be more advantageous when each entity is profitable and can independently use its own threshold.
A tax group may be more beneficial in situations where some companies are generating profits while others are making losses, as losses within the group can be offset against taxable profits.
A corporate tax group can also reduce certain transfer pricing documentation requirements for transactions between companies within the same group.
Businesses that choose not to form a tax group may still be able to transfer certain losses between commonly owned entities through qualifying group relief provisions, subject to meeting ownership conditions and filing requirements.
Tax planning needs a business purpose
Sawhney said businesses should regularly review their corporate tax structures, as arrangements that were effective in one period may become less suitable as revenue levels, cost structures, and ownership arrangements evolve.
Companies can reassess earlier decisions, including whether to operate as a tax group or maintain separate entities, provided any changes are supported by genuine commercial reasons.
“The most important part is documentation,” he said.
Any restructuring or tax-planning decision should be supported by a clear and legitimate business rationale, with proper records explaining the commercial reasons behind the approach.
Arrangements created solely to secure a tax benefit may fall within the UAE’s anti-abuse provisions, potentially exposing businesses to challenges during a tax assessment or audit.
