The difference between VAT and corporate Tax in the UAE is a notable issue to consider for businesses operating in a growing commercial environment. Like many businesses in the UAE, two relevant and significant taxes must be considered when planning and complying. VAT is a consumption tax, which is applied to most products and services sold by businesses, while corporate Tax is based on profits made by an organization. Both taxes support the goals of the UAE to have a strong and sustainable economy.
The United Arab Emirates started the Value Added Tax (VAT) in 2018, and Corporate Tax began in 2023. VAT is a tax added to things that people buy, and it is charged at every buying and selling process. Corporate Tax is only charged on the profit a business makes after it crosses a specific limit. Revenue created by these two tax systems will have a significant impact on spending, investment decisions, and overall economic activity. Companies that understand both taxes can make better financial decisions and stay strong in the UAE market.
How Is Corporate Tax Different from Value Added Tax In UAE?
The UAE is a top-tier business hub and has its own rules, so any entrepreneur beginning a business should have a clear picture of the tax system. Two primary taxes that are important are corporate Tax, which is based on profits, and value-added Tax (VAT), which is charged on goods and services sold and purchased. Both taxes have different purposes, and knowing these differences enables you as a businessman to follow the rules and manage your companies better. Understanding each of the tax systems will make compliance easier and encourage moving confidently in the UAE’s complex tax environment.
Corporate Tax
To grow the economy and depend less on oil, the UAE introduced Corporate Tax on 9 December 2022 through the Federal Tax Authority (FTA). The corporate Tax essentially works as a direct tax on the net profit of an individual company, which is calculated after expenses such as wages, rent, utilities, and cost of goods sold are deducted. The corporate Tax is to be paid directly to the FTA by the company itself, and annual returns are to be filed with the authority. The general rate of the corporate Tax is 9%, which applies to UAE and foreign organizations alike. Some profits are not taxed on group companies, company reorganizations, dividends from the UAE firms, and income from foreign companies.
Key Points
Companies pay Tax to the tax authority directly.
Tax is based on net profits after allowable expenses.
The standard rate in the UAE is currently 9%.
Tax applies to local and foreign companies.
Companies must file an annual tax return with audited financial statements.
Exemptions include intra-group profits, group re-organisation, dividends, and foreign income.
Regulations and Rates for Corporate Tax in UAE
The corporate tax authority in the UAE establishes clear guidelines for organizations depending on their yearly earnings. Companies with annual profits of AED 375,000 or less do not have to pay corporate Tax and are taxed at 0%. Companies with net profits of AED 375,001 or more must pay 9% tax on their earnings. The rules make sure that the right amount of Tax is paid and help the UAE’s growing economy meet global standards.
Valued Added Tax (VAT)
Value Added Tax (VAT) is an indirect tax on most goods and services in the UAE. It is a tax introduced by the UAE government on 1 January 2018 to provide a new source of revenue. VAT is set at a standard rate of 5%. The rules require businesses to register for VAT when the total value of taxable supplies and Tax liable imports exceeds AED 375,000. Businesses collect VAT from customers at every stage of production and supply, but the ultimate cost of VAT is paid by the final consumer. VAT collected by companies can then reclaim any VAT paid on qualifying and supplied business expenses. Specific sectors are excluded from VAT, including financial services, residential properties, bare land, and local passenger transport.
Key Points
Businesses collect from their clients and send it to the Federal Tax Authority (FTA).
The standard VAT rate in the UAE is 5%.
VAT is applied at every stage of the supply chain from the time of production until the final resale.
Businesses may recover VAT that they have paid on their purchases and expenses.
Applies to all taxable supplies of goods and services.
Specific sectors such as residential properties, financial services, and transportation may be exempt.
Difference Between Corporate Tax and Value Added Tax
Corporate Tax and VAT serve different purposes in the UAE and operate differently. Corporate Tax is a direct tax on profits of a company and is paid by businesses in the UAE at a rate of 9% on earnings over AED 375,000. VAT is an indirect consumption tax at a rate of 5% that companies will collect from customers, but is in fact paid by the end customer. Corporate Tax will affect financial planning and profit strategies, but VAT will impact the pricing of goods and services, as well as the cost of goods and services. Companies must also comply with each system by preparing and filing returns accurately, as well as keeping enough records of their activities to run smoothly under UAE tax legislation.
| Differences | Corporate Tax | Value Added Tax (VAT) |
| Definition | A tax on the money a company makes after all costs are paid. | A tax on things people buy, paid by the buyer but collected by businesses. |
| Example | A company earning AED 500,000 pays 9% tax on AED 125,000 (the part above AED 375,000), which is AED 11,250. | A shop buys something for AED 100 + 5% VAT (AED 5). Sell it for AED 150 + 5% VAT (AED 7.50). It gives AED 2.50 to the government. |
| Implementation Date | 1 June 2023 | 1 January 2018 |
| Tax Rate | 9% on taxable income above AED 375,000 | 5% |
| Payment Frequency | Payment once a year, due 9 months after the year finishes. | Payment four times a year. |
| Collection | Businesses collect from customers and pay to the FTA. | Businesses pay this tax on their profits. |
How Al Riyady Can Help Businesses with Corporate Tax and VAT
Al Riyady allows companies within the UAE to effectively manage both the Corporate Tax and VAT in a streamlined manner. We assist in calculating the taxable profits, preparing and filing the corporate tax return, dealing with exemptions, and managing the corporate tax rules. Indirect tax services such as VAT will also assist with registration and accurately calculating VAT on goods and services, preparation and filing of periodic returns, and reclaiming input VAT to optimize cash flow. We ensure that our clients keep proper records, meet all deadlines, avoid penalties, and regularly monitor their financial decisions throughout the operation of the UAE’s tax laws.
End
The difference between VAT and Corporate Tax in the UAE is important to understand in order for businesses to remain compliant and make smart financial decisions. Corporate Tax is a tax on profits earned by a company, whereas VAT is consumption tax that affects the pricing of goods and services and the overall cost. Understanding both VAT and Corporate Tax followed by correct processes will give businesses an efficient indication of their obligations, optimize their finances, and allow them to grow with ease in the potential of the UAE market.
