VAT vs Corporate Tax In UAE: Key Differences

Popular as a business-friendly hub, the UAE makes it easier for you to reach prominent international markets and secure attractive tax benefits. The Emirates is consistently strengthening its taxation system and legal framework. So, understanding VAT vs Corporate tax UAE is a must to comply with these taxes.

Many businesses mix up their VAT with annual Corporate Tax, and this confusion can lead to costly mistakes and legal problems.  Understanding the key differences between the UAE VAT and CT will help you protect your business from penalties and ensure tax compliance UAE. 

What is Value Added Tax (VAT) in UAE?

VAT was introduced in the Emirates to reduce the dependence on the oil sector for government revenue. This tax is charged on the sale of goods and services at each stage, from manufacturing to the final retail sale. Unlike CT, which is directly charged on profit, UAE VAT is a 5% indirect tax. 

The government has given the responsibility to collect this tax to businesses, but the final expenses are passed on to the person who buys goods or services. This means customers actually pay this tax when they make a purchase. Consumers don’t notice that they are paying for this tax, as it is included in the total price. 

What You Need to Know About VAT in UAE

As we discussed above, UAE VAT is a 5% indirect tax that was introduced to diversify government revenue. Businesses collect it on behalf of the country’s tax authority, and here are basic points you should know to maintain tax compliance UAE:

• Businesses don’t pay the total VAT collected to the government. They deduct the VAT they paid to the suppliers from what they charged their customers. If a business pays more VAT on purchases than it collects, it can apply for and receive a refund from the FTA. Tax experts, like Arabian Wingz can help with VAT refunds.

• The standard rate is applied to most goods and services, like clothing, cars, electronics, and others. Some suppliers, like exports of goods and services outside the GCC, international transport, specific healthcare, and educational services, are zero-rated. Some supplies like bare land, local passenger transport, and others, are not subject to VAT. This means businesses cannot reclaim input VAT on these items. 

• To maintain tax compliance UAE, businesses must understand that not every business needs to register with the FTA for VAT. If your annual taxable supplier and imports are more than AED 375,000, you have to register for it. Even if they have not exceeded in the last 12 months but are expected to rise in the next 30 days, you must register for VAT. If your taxable expenses are above AED 187,500, you can opt for voluntary registration. Non-resident businesses must register if they make taxable supplies in the UAE. 

What is Corporate Tax (CT) in UAE?

Company or corporate tax in UAE is a direct tax and is paid directly to the government. This tax is imposed on the net earnings or profit of a business. This means this tax is not calculated on total sales but on the profit remaining after deducting allowable expenses, like salaries, rent, and others. 

UAE CT is applied to both local and foreign businesses operating in the UAE, and they are themselves responsible for paying this tax to the government. So, the main VAT vs corporate tax UAE difference is that it is not paid by the customer, but by the business out of its net profit. 

What You Need to Know About CT in UAE

Corporate tax is applied to all businesses operating in the UAE, from foreign entities to sole proprietors and freelancers with an annual turnover of more than 1 million. Here are the main points about corporate tax that you must know to maintain tax compliance UAE:

• UAE corporate tax applies to financial years starting on or after June 1, 2023. CT is paid directly to the tax authority by both local and foreign businesses in the country. Whether a company is profitable or exempt, it must register for CT with the FTA and obtain a TRN to avoid penalties. 

• If your company’s net profit or taxable income is below or equal to AED 375K a year, you don’t have to pay CT in the UAE, as your business qualifies for a 0% tax rate. However, if the income is above AED 375K a year, a 9% CT is applied on net profits. All taxable persons must keep records for 7 years and file returns timely within 9 months of the end of the financial year. 

• Mainland companies registered with DED in the UAE must register for CT and pay a 9% tax rate on the net profits that exceed AED 375,000. Companies in free zones may qualify for a 0% rate on qualifying income. To maintain their QFZP status, they have to comply with transfer pricing rules, maintain substance, and meet other specific conditions. 

VAT vs Corporate Tax UAE: 5 Main Differences

Understanding VAT vs corporate tax UAE is important for every business, as both taxes are different. You must know how they work, as this will help you in maintaining tax compliance and avoiding penalties. Here are the 5 main differences between them that will clear all your confusion:

• Nature of Tax (Direct vs. Indirect): The major distinction between CT and VAT is that CT is a direct tax and is paid by the business on its net profit. Businesses calculate it on annual earnings by deducting expenses. However, VAT is an indirect tax collected by businesses from customers. They only pay the collected tax to the government, so the final financial burden is on customers. 

• Tax Base and Rates: UAE CT is charged at 9% on taxable income or profits over AED 375,000, while VAT is a 5% tax applied to most goods and services sold in the UAE. So, when comparing VAT vs corporate tax UAE, you must understand that the first is based on profit, while the other is based on sales value. 

• Registration Thresholds: Businesses must register for VAT if their annual taxable turnover is more than AED 375,000. However, the option for voluntary registration at AED 187,500 is also available. 9% CT is applied on qualifying income, while a 0% rate is applied on profits or revenue below AED 375K. You just need to follow these rules to maintain proper tax compliance UAE. 

• Payment and Filing Frequency: VAT returns are usually filed monthly or quarterly based on the FTA requirements. UAE CT is calculated and paid after the end of the financial year (annually). When you compare VAT vs corporate tax UAE, you will understand that VAT requires more frequent reporting than CT. 

• Impact on Cash Flow: VAT directly impacts daily cash flow because businesses collect it on sales and pay it regularly. They must manage input and output VAT carefully to avoid tax compliance UAE issues. CT mainly affects the final yearly profit and long-term financial planning.

Get Professional Tax Support from Arabian Wingz

After comparing VAT vs corporate tax UAE, you now understand that they have distinct roles in the country’s tax system. VAT affects daily transactions, while CT focuses on annual profits. By clearly understanding the differences between these two, you can plan your finances better. You need to maintain accurate records and meet all filing obligations to avoid legal issues.

As the tax rules in the UAE are constantly changing, you must secure expert guidance from tax specialists. With Arabian Wingz, you secure the right guidance and tax planning support. Our team helps you to stay fully compliant with evolving tax rules. We stay updated on new FTA rules, ensure your transactions are correctly classified, and help you maintain proper records. We make sure you are always prepared for unexpected audits. 

Partner with Arabian Wingz, leading tax consultants in the UAE, to stay worry-free about late registration and or filing mistakes. Our experts ensure timely and accurate submissions. The Emirati tax system is business-friendly, as companies only need to ensure compliance to avoid legal risks. Contact our tax expert to get customized guidance for your needs.