What are corporate taxes? -How corporate tax in the UAE will affect small businesses
The United Arab Emirates (UAE) has introduced a new corporate tax law that will affect businesses operating within the country. The law, which came into effect on June 1, 2023, imposes a 9% tax on all companies except those in the oil and gas sector and free zone companies. In this note, we will discuss in detail how the corporate tax in the UAE will affect small businesses.
What are corporate taxes? -Impact on Small Businesses:
Financial Burden
The introduction of corporate tax will mean that small businesses operating in the UAE will have to pay additional taxation. It may lead to an increased financial burden on small businesses. Smaller companies may face challenges adjusting to the new tax regulations and may need to hire additional staff or seek professional advice to ensure compliance.
For example, a small business that generates AED 1.5 million in revenue and has a net profit of AED 5,00000 will now have to pay (125,000*9%) AED 11,250 in corporate tax. This amount may seem small, but for a small business with limited resources, it can have a significant impact on its bottom line.
Reduction in Profits
The imposition of corporate tax will lead to a reduction in profits for small businesses. It could impact the ability of small businesses to reinvest in their operations and limit their growth potential. Additionally, small businesses may have to increase the prices of their products or services to compensate for the tax, which may impact their competitiveness in the market.
For instance, the introduction of the corporate tax has caused a small business with a 10% profit margin to see its profit margin drop to 9%. Although this profit decline may not seem significant, it has a major impact on how long the company can survive.
Increased Compliance Burden
The introduction of corporate tax also means an increased compliance burden on small businesses. It may be a challenge for small businesses that do not have the resources to hire tax professionals or may not have the expertise to navigate the tax system.
For example, a small business that has not kept accurate financial records may struggle to prepare its tax return and may face penalties for late filing or inaccurate information. It can lead to an additional financial burden on the small business.
Impact on Start-Ups
The tax holiday offered to start-ups is a welcome relief for new businesses, but it may not be enough to encourage entrepreneurs to start businesses in the UAE. The introduction of corporate tax may make it more challenging for start-ups to survive in the market and could impact the overall entrepreneurial ecosystem in the country.
For example, a start-up that has just started generating revenue may find it challenging to pay the corporate tax in the first few years of its operations. It can limit the ability of the start-up to reinvest in its operations and grow its business.
Government Support:
The UAE government has announced many initiatives to promote small businesses, including a five-year tax vacation for start-ups and enterprises that satisfy specific requirements. Additionally, the government has announced many exemptions and incentives to encourage companies to invest in the country.
Tax Exemptions
The UAE government has announced many tax exemptions for companies operating in specific sectors, including the following:
a. Oil and Gas Sector: Companies operating in the oil and gas sector are exempt from corporate tax.
b. Free Zone Companies: Free zone companies are also exempt from corporate tax.
c. Healthcare and Education Sectors: Companies operating in the healthcare and education sectors are exempt from corporate tax.
What are corporate taxes? How corporate tax in the UAE will affect small businesses- Conclusion
In conclusion, the UAE’s decision to enact corporate tax will affect the nation’s small enterprises. To stay competitive in the market, small firms may need to examine the impact the tax will have on their operations and make changes. To ensure small firms’ survival and growth in the face of the new tax system, the government may need to offer more help to them.