UAE corporate tax for small businesses: the essentials

Many small business owners in the UAE first met corporate tax through a message from their accountant saying they needed to register. The natural reply was to ask why, if the business would probably owe nothing. The answer is that corporate tax is a compliance system first and a bill second.

This is a plain summary of the parts that matter most to a small business, particularly one that sells services. It is general information, not tax advice. Rules and deadlines change, and your position depends on your licence, your customers and your accounts, so confirm it with a registered tax agent before relying on any of it.

How the rate works

Corporate tax applies to UAE businesses for financial years starting on or after 1 June 2023. For a mainland company the structure is simple: 0% on taxable income up to AED 375,000, and 9% on taxable income above that. The bands apply to taxable income, which is accounting profit adjusted under the tax rules, not to revenue.

Take a business with taxable income of AED 500,000. It pays nothing on the first AED 375,000 and 9% on the remaining AED 125,000, a bill of AED 11,250. With taxable income of AED 300,000, the same business would owe nothing at all, but it would still have to register and file.

Corporate tax and VAT are separate. Each has its own registration and its own returns, and being registered for one does not register you for the other.

Register first, whatever you owe

Every business subject to corporate tax must register with the Federal Tax Authority, including free zone companies and those that expect to pay nothing. A UAE company incorporated on or after 1 March 2024 has three months from its date of incorporation. Earlier companies had deadlines during 2024, so if yours has not registered, deal with that before anything else.

After registration, the return and any tax due are both due within nine months of the end of the tax period. The tax period normally follows your financial year, so the year end you picked, perhaps without much thought at setup, fixes your filing calendar for good.

Small business relief, now to 2029

For most small businesses, small business relief is the provision that actually applies. A resident business that elects it is treated as having no taxable income for that tax period, so no corporate tax is payable, and it files a simplified return.

• Revenue must be AED 3 million or less in the tax period, and in every previous tax period. Cross the line once and the relief is no longer available, even if revenue later falls back.
• The test is revenue, not profit. A busy firm on thin margins can pass AED 3 million well before it makes much money.
• It has to be elected for each tax period. It does not happen automatically.
• Qualifying free zone persons cannot use it, and neither can members of large multinational groups.
• Splitting one business into several to stay below the threshold is treated as an arrangement to obtain a tax advantage, and the anti-abuse rules apply.

The relief originally covered tax periods ending on or before 31 December 2026. In August 2026 the Ministry of Finance extended it, through Ministerial Decision No. 131 of 2026, to tax periods ending on or before 31 December 2029. The AED 3 million threshold did not change.

There is one trade-off to raise with your tax agent. Losses from tax periods in which you do not elect the relief can be carried forward, but a period in which you do elect it is treated as having no taxable income at all. In a loss-making year, electing the relief may not be the obvious choice it appears to be.

Records you can produce on request

Records must be kept for at least seven years after the end of the tax period they relate to. That applies to businesses using small business relief too, because the FTA needs to be able to check that revenue really was under the threshold.

The core records are a record of transactions in the period, a record of assets including purchases and disposals, a record of liabilities, and a record of shares held at the end of the period. For a service business, that means invoices, credit notes, bills, contracts and bank statements that agree with one another.

Corporate tax is hardest not for the businesses that owe the most, but for those that cannot show, quickly, what they earned and why.

The free zone assumption

Plenty of owners chose a free zone partly because they heard free zone companies pay 0% corporate tax. That holds for a qualifying free zone person, but only on qualifying income, and only for as long as it meets every condition:

• It must keep adequate substance in the free zone.
• It must derive qualifying income, and must not have elected to be taxed at the standard rates.
• It must follow the arm's length principle with related parties and keep transfer pricing documentation.
• It must keep audited financial statements, whatever the size of its revenue.
• Its non-qualifying revenue must not exceed AED 5 million or 5% of total revenue, whichever is lower.

Qualifying income comes mainly from transactions with other free zone persons, or from a defined list of qualifying activities such as manufacturing, logistics and fund management. Creative and marketing services are not on that list. So a free zone studio or agency whose clients are mostly mainland brands may find that most of its revenue is non-qualifying, which can breach the de minimis limit.

The consequences are serious. A qualifying free zone person does not get the AED 375,000 band at 0%, so non-qualifying taxable income is taxed at 9% from the first dirham. It cannot use small business relief. And a business that fails a condition loses qualifying status for that tax period and the four after it. If you are in a free zone and assuming a 0% rate, ask a tax agent to test that against your actual customer list.

A checklist for this quarter

• Confirm that you are registered, and note your filing deadline.
• Work out your revenue for every period since your first, because the small business relief test looks backwards.
• If you are in a free zone, find out whether you are a qualifying free zone person at all.
• Make sure your invoicing produces a clean, numbered register that matches the bank, because every other part of this depends on it.

Clean records will not file the return for you. That stays the job of your accountant or a registered tax agent, but invoices, credit notes and payments kept in sequence against each customer give them a far better place to start.

The tax advice belongs with your tax agent. If the records behind it need tidying, though, from how invoices are raised to the workflows that feed your accounts, ALXO would be glad to talk it through with you.