Corporate Tax Case Study: Small Business Relief Election Eliminates Tax Loss Carry Forward

Before starting the article, please note that the company name used in this example is fictional and is provided for illustrative purposes only. A startup company have elected for the Small Business Relief option in their first corporate tax return filing to get the advantage of simplified return filing procedures and a zero percentage corporate tax benefit. However, this decision resulted in disqualifying the company from carrying forward substantial tax losses. This case study shows how early elections can cause a long-term impact under the UAE Corporate Tax Law.

Background of the Company

Company Name: Insightful Marketing Consultants LLC

Location: Dubai Mainland

Activity: Digital marketing and brand advisory

Annual Revenue (FY 2024): AED 2.1 million

First Tax Period: 1 January 2024 to 31 December 2024

Insightful is a new marketing agency offering brand development and social media strategy. The company have incurred huge incorporation costs and initial operating expenses during its inception year, resulting in a net accounting loss for the year 2024.

Objective

The shareholders and management focused on:

Simplify the procedures for corporate tax return filing
Minimise the possibility of making errors in the first filing
Claim Small Business Relief under Article 21 of the Corporate Tax Law to get the benefit of zero percentage corporate tax
Carry forward current year tax losses to set off against the coming year's profit.

Unfortunately, they have not done a detailed study on how the election of the Small Business Relief option will going to affect their current year loss treatment and how it will impact next year's filings

Legal Framework

Under Article 21 and Ministerial Decision No. 73 of 2023, those businesses with a turnover not exceeding AED 3 million during the relevant tax period can elect for Small Business Relief, which:

Will treats the entity as if it has no taxable income, even though they have taxable income exceeding the threshold for Corporate tax
If electing for small business relief, businesses need not calculate and pay corporate tax on their income. It is treated as if the business earns no taxable income for the relevant tax period. They will have to file only a simplified tax return. However, they still have to retain all the relevant documents and records to support their corporate tax filings.
Businesses elected for small business relief will not be able to accrue, utilise or transfer tax losses during the tax period when the relief is availed. Also prevents the disallowance of net interest expense for that period

This election is optional, but once made, tax losses incurred during the elected year cannot be carried forward.

What Happened

Insightful incurred a net tax loss of AED 450,000 in FY 2024 due to upfront incorporation costs, branding costs, hiring, marketing campaigns and other operating expenses.
The accountant has filed the Corporate Tax Return under the Small Business Relief option, thinking that it will make their work easier and save time and cost. Under this option, they can file a simplified return.
This SBR election restrained the company from getting the benefit of recognising the AED 450,000 loss, which would have otherwise been used to set off against their future profits.
The expected net taxable income for the company will be over and above AED 1 million for the year 2025. However, they will not get the benefit of setting the previous year's tax losses against the current year's taxable income, as they have opted for SBR. This will result in paying a huge amount of corporate tax in 2025.

corporate tax

Financial Consequences

Tax for the FY 2025 will be 9% on taxable income exceeding AED 375000. ie ( AED 1000000-375000)*9% = AED 56250 (Approximately)
Potential tax saving lost: AED 40,500 (AED 450,000 x 9%)
Total compliance savings from opting for Small Business Relief are negligible compared to the future tax impact. If they have opted for regular filing, they will be entitled to get the benefit of setting corporate tax on last year's losses against the current year's taxable profit.

Lessons Learned

1. Small Business Relief is a Trade-Off: It makes the tax compliance and filing easier, but prevents the companies from getting key corporate tax benefits like carry-forward of tax losses.

2. Revenue-Only Rule: The threshold of AED 3 million for availing the benefit of Small Business Relief is on gross revenue only, not based on taxable profit or loss

3. Proper Tax Planning is inevitable Even for Startups: While making tax elections for the first corporate tax year, every business, especially startups, should keep in mind tax implications for upcoming years as well.

Strategic Considerations

If your startup anticipates a loss in the first corporate tax year and a profit in the next year, it is advisable not to elect for Small Business Relief unless there are other compelling reasons.
Make a proper analysis of different tax outcomes before making optional elections in the EmaraTax Portal.
Need to keep in mind that the first year's return and the elections set criteria for future return filing models.

How Flying Colour Can Help

As Flying Colour Tax Consultants, we assist:

Startups and SMEs should have an efficient tax planning strategy to get the maximum benefit of tax savings.
First-year return filing under the UAE Corporate Tax Law
Loss optimisation and carry-forward planning
Voluntary Disclosure if an incorrect election is made

To learn more about Corporate Tax Case Study: Small Business Relief Election Eliminates Tax Loss Carry Forward, book a free consultation with one of the Flyingcolour team advisors.

Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.