UAE startups and small businesses now have a clearer understanding of how to manage their interest expenses under the new corporate tax system, with certain tax relief options for the 2024-2026 period.
The UAE tax regulator has outlined the steps small businesses must follow when structuring their interest expenses for tax purposes. Companies with revenues of Dh3 million or less in any year between 2024 and 2026 can opt for the Small Business Relief (SBR) program. By choosing this option, businesses will be exempt from corporate tax until the end of 2026, but there are important conditions to note.
Key Points for Small Businesses Under SBR:
- No Interest Deductions: Companies opting for SBR cannot deduct net interest expenses, as they are treated as having no taxable income.
- No Carry-Forward of Interest: Any net interest expenses incurred during a tax period cannot be carried forward to subsequent years.
- Interest Expenses and Taxable Income: Normally, interest expenses are deductible when calculating taxable income. However, under SBR, the company must forfeit this benefit during the chosen program period.
While it may seem restrictive, the SBR program offers long-term flexibility for small businesses.
Opportunity for Future Relief:
Small businesses that don’t opt for SBR in 2024 but wish to do so in 2025 or 2026 can still access the relief program. However, any unclaimed interest expenses from 2024 cannot be deducted during the following two years. Those expenses can be carried forward beyond 2026, offering flexibility for businesses to offset them in future profitable years.
According to Girish Chand, senior partner at MCA Gulf, businesses that are loss-making may benefit more from skipping the SBR option. By doing so, they can carry forward tax losses to offset profits in later years. On the other hand, profitable businesses could find the SBR program beneficial for reducing immediate tax liabilities.
Tax Deductions for Interest Expenses:
Interest expenses are typically deductible when calculating a business’s taxable income. These expenses include amounts paid for borrowed capital, guarantee fees, legal and professional fees, loan prepayments, and arrangement fees. However, tax law has specific limits on these deductions.
The following conditions prevent interest deductions:
- The business does not incur this interest.
- The interest is dependent on exempt income.
- The interest is paid to connected or related parties at non-market rates.
Rules for Borrowing Before and After 2022:
For borrowings made before December 9, 2022, full deductions on interest are allowed. Borrowings made after that date, however, have stricter rules:
- For borrowings up to Dh12 million, deductions are fully allowed.
- For borrowings exceeding Dh12 million, deductions are limited to 30% of EBITDA.
Conclusion:
Small businesses should carefully weigh their decision to opt for the SBR program based on their current and projected profitability. While it offers short-term relief from corporate tax, businesses must consider the long-term implications of not being able to deduct interest expenses or carry forward losses. UAE businesses need to structure their tax plans effectively to benefit from the available tax breaks.
