The Impact of Corporate Tax in the UAE on Small and Medium Enterprises (SMEs)

A concise guide on how the UAE’s new corporate tax impacts SMEs and what they can do to stay compliant and competitive.

5/19/20253 min read

Introduction

The UAE has long been known for its business-friendly tax environment, particularly its zero-income tax policy, which has attracted entrepreneurs and multinational companies alike. However, with the introduction of the federal Corporate Tax (CT) at 9%, effective from June 1, 2023, the dynamics of doing business in the country have begun to shift. While this move aligns the UAE with global tax standards and enhances transparency, it also raises important questions—especially for Small and Medium Enterprises (SMEs), which make up over 94% of businesses in the UAE.

In this blog, we explore how this new corporate tax regime affects SMEs, both positively and negatively, and how businesses can prepare to remain compliant and competitive.

Why Introduce Corporate Tax in the UAE?

The UAE introduced Corporate tax for several reasons:

To diversify national revenue sources beyond oil
To meet international tax standards such as the OECD's Base Erosion and Profit Shifting (BEPS) framework
To reinforce the UAE’s commitment to transparency and fair taxation

Key Features of the UAE Corporate Tax Regime

Before diving into the impact, it’s important to understand the basics of the new corporate tax regime:

Tax Rate: 9% on taxable profits exceeding AED 375,000
Exemption Threshold: No tax on profits up to AED 375,000 (a relief aimed specifically at supporting SMEs)
Free Zones: Qualifying Free Zone entities may enjoy 0% tax on qualifying income
Scope: Applies to all businesses and commercial activities, except for exempt sectors (e.g., natural resource extraction)

Positive Impact on SMEs

1. Encouragement of Better Financial Practices

The requirement to calculate taxable income and maintain proper books of accounts encourages SMEs to adopt structured accounting systems and improve financial transparency.

2. Level Playing Field

A unified corporate tax regime creates fair competition between foreign multinationals and local SMEs by applying the same rules across the board.

3. Increased Investor Confidence

Adhering to international tax standards enhances the UAE’s reputation, potentially attracting foreign investors to local SMEs that demonstrate tax compliance and robust financial governance.

Challenges Faced by SMEs

1. Compliance Burden

For many small businesses with limited administrative resources, adapting to the tax system—understanding tax rules, maintaining records, and filing returns—can be overwhelming and costly.

2. Need for Professional Support

SMEs may need to hire external accountants or tax consultants to ensure compliance, which increases operational expenses.

3. Cash Flow Pressure

Even a 9% tax on profit can impact cash flow for SMEs that operate with thin margins, especially in sectors like retail, food services, and trading.

4. Penalties for Non-Compliance

The UAE Federal Tax Authority (FTA) imposes penalties for late filing, non-registration, and inaccurate reporting, posing a risk for unprepared SMEs.

How SMEs Can Prepare

1. Assess Corporate Tax Applicability
Determine if your business is subject to corporate tax and whether you qualify for any exemptions.

2. Register with the FTA
Ensure timely registration and obtain a corporate tax registration number.

3. Maintain Proper Books of Accounts
Adopt or upgrade accounting systems to ensure accurate financial records are kept for at least 7 years.

4. Seek Professional Advice
Consider partnering with tax advisors or consultancy firms to ensure compliance and strategic tax planning.

5. Optimize Profit Margins
Review your pricing and cost structures to accommodate the tax without impacting business sustainability.

Get Professional Help from ALWAHAT

Understanding and implementing corporate tax regulations can be complex, especially for small businesses. At ALWAHAT Accounts & Internal Audit Services, we provide expert guidance and tailored support to help SMEs across the UAE manage their tax obligations effectively.

📞 Contact us today for a professional consultation and ensure your business is on the right track.

Disclaimer

This blog is intended for general informational purposes only and does not constitute legal, tax, or financial advice. For official guidance, please refer to the UAE Federal Tax Authority (FTA) issuances, laws, and regulations.
Always consult a qualified tax advisor or the FTA directly for matters related to corporate tax compliance and interpretation.