What is the Small Business Relief (SBR)?
The UAE introduced a 9% corporate tax for businesses. But to support smaller entities, the government rolled out the Small Business Relief program under Article 21 of the UAE Corporate Tax Law, supported by Ministerial Decision No. 73 of 2023.
Here’s how it works:
If your annual revenue is AED 3 million or less in any of the years between 2024–2026, you can apply for SBR. If approved, you won’t be subject to corporate tax during that period.
However, there are some trade-offs, especially when it comes to interest expenses.
Important: If your revenue exceeds AED 3 million in any tax period from 2024 to 2026, you will no longer be eligible for SBR from that year onward.
Interest Expenses: What You Can and Can’t Do Under SBR
One major point of clarification from the FTA is around interest deductions.
If you opt into SBR you cannot deduct any net interest expense during the tax period. You also cannot carry forward those interest expenses to future years. Why? Because by opting for SBR, you’re telling the government that you’re not making taxable income, so there’s nothing to deduct from.
A Strategic Choice: Opt In or Out of SBR?
Let’s say your business has taken out a loan and paid interest in 2024.
If you skip SBR in 2024, you can deduct interest (subject to limits) and carry forward any unused interest expenses for up to 10 years from the end of that tax period.
This could be a smart move if:
- You’re currently making losses, but expect to be profitable in the future.
- You want to preserve those deductions for when you actually owe tax.
On the flip side, if you’re already profitable, going with SBR might help reduce your immediate tax burden, especially if your revenue is under the AED 3 million mark. Before you make a decision, run the numbers. It could be worth skipping SBR now to benefit more in the future.
What Counts as “Interest” for Tax Purposes?
According to the FTA, “interest” includes more than just the interest rate on a loan.
Here are some examples of deductible interest-related costs:
- Loan arrangement fees
- Guarantee and underwriting fees
- Legal and professional fees related to loans
- Early repayment penalties
However, it’s important to remember the purpose of the borrowing matters. If the loan wasn’t for your business operations, it’s not deductible. If the loan is used to earn exempt income, it’s not deductible. Lastly, if the loan is from a related party and not at fair market terms (not “arm’s length”), it’s not deductible.
Borrowed Before or After December 9, 2022? It Matters.
If your borrowing happened before December 9, 2022, your interest expenses are fully deductible. For borrowings after that date, only interest on loans up to AED 12 million is fully deductible. Anything above AED 12 million? Only 30% of EBITDA is deductible.
Think Long-Term
The new guidelines give small businesses a lot more clarity and flexibility. But that also means the decision to opt into SBR or not should be strategic. If you’re a profit-making small business under AED 3M revenue, SBR might be the right short-term play. If you’re loss-making or planning long-term growth, skipping SBR now could save you more later via interest and tax loss deductions.
Does Small Business Relief (SBR) apply to Free Zone companies in the UAE?
Yes, free zone businesses can qualify for SBR, but only if they meet certain conditions just like mainland companies.
To qualify for SBR as a Free Zone entity, you must:
- Be a “Resident Person” under the UAE Corporate Tax Law
- Have revenue ≤ AED 3 million in any of the years 2024, 2025, or 2026.
- Not be part of a Multinational Enterprise Group (MNE) (i.e., global revenues ≥ AED 3.15 billion).
- Not be a Qualifying Free Zone Person (QFZP) choosing the 0% tax benefit on qualifying income.
What about interest expense deductions for Free Zone companies?
The same rules apply:
- If you’re under SBR you can’t deduct interest or carry it forward.
- If you’re not opting for SBR you can carry forward unutilized interest expenses for up to 10 years, subject to the general interest deduction limitation rules.
This applies regardless of being in a Free Zone or the mainland, as long as you’re not claiming the QFZP 0% rate.
What should a Free Zone business do?
If you are a QFZP meaning you meet the necessary substance requirements and earn qualifying income, mostly from other Free Zones or foreign clients then you’re already eligible for a 0% corporate tax rate on that income, and there’s no need to apply for Small Business Relief (SBR).
However, if you don’t qualify as a QFZP but your annual revenue is AED 3 million or less, opting for SBR can exempt you from corporate tax entirely until the end of 2026. This makes it a simple and effective choice for small, profitable businesses that don’t need to claim interest deductions or carry forward losses.
On the other hand, if you’re not a QFZP and your business is in an early or investment-heavy stage you might be better off skipping SBR so you can carry forward those deductions for up to 10 years. You can then offset them against future profits when you become taxable, making this a more strategic long-term play.
Navigating the UAE’s evolving corporate tax landscape doesn’t have to be overwhelming, especially for startups and SMEs setting up in Dubai’s Free Zones. With the right guidance and strategic planning, you can make informed decisions that support both your short-term savings and long-term growth. At IFZA, we specialize in helping entrepreneurs understand the fine print of business setup and tax structuring, ensuring you’re fully compliant. Get in touch with us today.
Disclaimer: The information provided in this article is accurate at the time of publication. Please note that regulations, policies, and event details may be subject to change. We recommend consulting with relevant authorities for the most up-to-date guidance.
