UAE new ventures and small-businesses have the freedom to tailor their 2024-26 tax effect.
Small enterprises of the UAE intending to join a corporate tax exemption scheme have received additional guidance regarding the treatment of interest costs.
UAE government has offered relief to businesses with annual revenues of AED 3 million or less for any year between 2024 and 2026 by allowing them to voluntarily opt into the ‘Small Business Relief’ program. This exempts them from the structure of corporate tax until the end of 2026.
However, these businesses are subject to special provisions:
The entity does not have the opportunity to subtract any “net interest expenditure.” According to SBR, the companies are disregarded as having any earnings subject to taxation. Moreover, it will not be able to roll over any net interest cost valid in this tax period to any “subsequent” taxation period.
Interest costs are usually deductible when determining a taxable business earnings for a given tax period. The latter section can be beneficial for micro enterprises that want to benefit from the corporate tax exemption. Let’s say that the SME chooses not to enroll for the SBR for the taxation period 2024, but has accumulated interest costs for the duration, the SME can still achieve SBR exemption for 2025 and 2026, but the interest costs not claimed in 2024 can not be claimed in 2025 and 2026. They can roll over that cost from 2024 into taxation periods after 2026.
Actually, the FTA (Federal Tax Authority) states the SME can roll over the prohibited net interest cost for up to a further 10 taxation periods. In these situations, SMEs that are losing money might gain more from forgoing SBR since they can use their taxation losses in later profitable times.
Although SBR may provide administrative convenience, but SMEs should consider how it might affect their profit potential before they make the decision to register. By choosing SBR, you also give up the option to use tax losses as a deduction for future gains. If non-profitable SMEs don’t choose SBR, they would be better off in the long run, because then they can apply taxation losses in future years when they make profit. Profitable SMEs, on the other hand, might benefit from SBR to lower their immediate tax obligations.
Deduction of Interest Expense
Interest expense deduction is generally allowed when computing a taxable business earnings for that tax year. Deduction of interest for corporate tax motives does have restrictions. It contains interest earnings and interest expense, which generally means costs paid for consuming money, credit, and other related costs. Taxable people will have to determine what is considered ‘interest’ from the definition under the corporate tax law, not what constitutes interest under IFRS (or IFRS for SMEs).
What Qualifies as Tax-Deductible Interest Expenses?
The different types of expenditures that a business may bear in borrowing capital or acquiring capital through financial instruments (excluding equity instruments). These include professional costs, legal costs, guarantee costs, underwriting costs, placement costs, and other costs accumulated in advance or prepayment of the loan, all of which would be incorporated together as interest costs.
The following situations prohibit the deduction of interest expenses:
- That not sustained for the purposes of the business of the taxable person.
- Interest costs associated with calculating excluded income.
- Interest payments that are not at “arm’s length” are owed to “connected persons” and/or linked parties.
Check these computations
If a business has interest costs from borrowings raised before December 9, 2022, the deductions are fully permitted. For borrowings made after December 9, 2022, tax reductions of up to Dh12 million are fully permitted. After December 9, 2022, every borrowing above Dh12 million is capped at 30% of EBITDA.
