How is Corporate Tax Different from Value-Added Tax in the UAE?
If you’re a business owner, the UAE tax system may also seem like a labyrinth, but knowing the distinction between Corporate Tax and VAT is crucial to running your business and remaining compliant. Corporate Tax: A 9% tax on business profits over AED 375,000 to expand the UAE’s economy and diversify sources of revenue, launched in 2023. Value added tax—Consumption tax VAT, a 5% consumption tax, applies to the supply of goods and services at each stage of the supply chain since introduced in 2018.
Whereas Corporate Tax is directly aimed at your company’s profits, VAT must be paid by consumers and is collected by companies. Understanding these differences aids with tax filing in the UAE, business formation in the UAE, and tax penalty avoidance. In this post, I’ll simplify the UAE tax system and how these taxes function, as well as practical tips on how to manage them, whether you’re considering company formation in Dubai or working towards a UAE Golden Visa.
What is Corporate Tax in the UAE?
The UAE Corporate Tax is a tax levied on the net profits of a company (this Tax is also known as a corporate income tax or a business profits tax). The UAE Corporate Tax Law, effective from June 1, 2023, is relevant to taxable income derived from business activities carried on by corporations that are involved in any form Ft involved in business setup in Dubai or elsewhere in the Emirates. The UAE CT system. Besides natural persons with commercial or professional activities as defined by the Corporate Tax Decree issued on December 9, 2022, the UAE CT regime focuses on juridical persons (LLCs, for example).
Corporate Tax Rates and Exemptions
Corporate Tax Rates in the UAE
| Taxable Income | Corporate Tax Rate |
| Up to AED 375,000 | 0% |
| Above AED 375,000 | 9% |
| Multinational Enterprises (MNEs) | Subject to BEPS 2.0 Pillar 2 rules as per OECD guidelines |
Corporate Tax Exemptions
| Entity / Transaction Type | Exemption Condition |
| Free Zone Companies | Must meet specific conditions, e.g., no mainland transactions |
| Government Entities | Automatically exempt |
| Not-for-Profit/Public Benefit Entities | Must qualify under approved categories |
| Intra-group Transactions | Exempt under qualifying conditions |
| Dividends (UAE and Foreign Companies) | Exempt from Corporate Tax |
| Group Restructuring Gains | Exempt if conditions for reorganization are met |
What is Value-Added Tax (VAT) in the UAE?
- Definition and Scope
UAE VAT is a transaction-based tax that is imposed on the majority of goods and services at a VAT rate of 5%. Whereas CT is levied on profits made by businesses, VAT is paid by the end consumer, collected at each tier of the supply chain. A retailer remits that AED 50 to the Federal Tax Authority, for example, when you purchase a phone costing AED 1,000 plus AED 50 VAT.
VAT is in use in more than 150 countries and is a true form of standardization. which in the case of the UAE is revenue diversification for the UAE economy.” Businesses engaging in business setup in the UAE need to know the VAT law to avoid any tax penalties.
- VAT Registration and Exemptions
Necessity for VAT registration UAE. Here is the third step: A property management company should register for VAT if its taxable supplies and imports have exceeded or are expected to exceed the mandatory registration threshold of AED 375,000 over the past year or the next 30 days. If your taxable supplies or taxable expenses are between AED 187,500 and AED 375,000, then you may apply for the voluntary registration threshold.
Some sectors are VAT-exempt:
- Life insurance, reinsurance, and related services (in accordance with VStG).
- Dwelling, unimproved, and local passenger transport.
How Do Corporate Tax and VAT Differ in the UAE?
- Tax Base and Incidence
Difference between Corporate Tax and VAT May 15, 2014 The key difference between Corporate Tax and VAT is that while the tax base of Corporate Tax is the profit of the business, the tax base of VAT is the consumption volume. Corporate Tax is a tax on your profit and is geared towards your net profit less any expenses you can claim. For example, a Dubai-based tech startup may pay 9% on AED 25,000 (AED 2,250) of AED 400,000 in net profits. But VAT is a consumption tax, levied on the price of goods or services, such as a 5% surcharge on an AED 100 meal (AED 5).
Tax incidence also varies. Corporate Tax is paid by the company, reducing profit and possibly shareholders or workers. VAT is borne by everyone and is collected by the businesses on behalf of the Federal Tax Authority from the final customer. This renders VAT ‘neutral’ for businesses, because they reclaim VAT on their purchases.
- Tax Collection and Filing
VAT is collected on every stage of the supply chain. Companies add VAT on top of sales and subtract VAT that they paid in purchases, and pay the difference to the Federal Tax Authority every three months. For instance, someone who purchases goods for AED 100 + AED 5 VAT and sells for AED 150 + AED 7.50 VAT will pay AED 2.50 to the tax authorities.
- Impact on Business Operations
VAT affects price policy, as companies absorb it in the final price, which may also lead to consumer spending being affected. For example, a high VAT could increase prices, dampening demand for non-essential items. Corporate Tax does not impact pricing but affects cost control, investment, etc. The high Corporate Tax rate could dissuade lower investments in high-tax countries.
How Do These Taxes Affect Your Business Setup in the UAE?
- Corporate Taxes for Startups and SMEs
When you start a UAE Business, especially company formation in Dubai is important to plan for Corporate Tax. Startups and SME’s take advantage of the 0% tax rate on taxable income up to AED 375,000; surely, the UAE presents a tax-friendly environment for businesses. Example: A small consultancy that makes AED 300,000 in net income – pays no Corporation Tax, which makes the business more competitive.
But also with Corporate Tax, the idea is that you monitor the earnings of the business and the business expenses. Transfer Pricing Rules. It also applies to your startup if it trades with foreign branches or associated companies. A business set-up consultant in Dubai could help you overcome these regulations, especially if you are a Free Zone business looking for a Corporate Tax exemption.
- VAT Compliance for New Businesses
New Business VAT Compliance: Taxable supplies explained. Ensuring compliance with VAT obligations as a new business begins with knowing what constitutes a ‘taxable supply’. For those who wish to set up a business in the UAE and have a retail or service business that exceeds AED 375,000 in taxable supplies, the mandatory registration threshold is applicable. Voluntary registration of small businesses at AED 187,500 can mean recovery on their purchases and better cash flow.
FAQs
Q1: Is Corporate Tax mandatory for all businesses in the UAE?
No, Corporate Tax only applies to businesses with net profits above AED 375,000.
Q2: Do free zone companies pay Corporate Tax in the UAE?
Only if they don’t meet the exemption criteria, such as avoiding mainland transactions.
Q3: When do businesses need to register for VAT in the UAE?
VAT registration is mandatory if annual taxable supplies exceed AED 375,000.
Q4: How often must VAT returns be filed in the UAE?
VAT returns are typically filed on a quarterly basis.
Q5: Can a small business claim VAT refunds in the UAE?
Yes, if voluntarily registered and eligible, small businesses can recover input VAT.
Conclusion: Navigating UAE Taxes for Business Success
Difference between Corporate Tax and VAT in the UAE Knowing the difference between Corporate Tax and VAT in the UAE is vital for business setup in Dubai and to flourish in the UAE Tax system. Corporate Tax (a profit tax) aims for your net profit at AED 375,000 +9%, and VAT (a consumption tax) puts 5% on goods and services, and goes to the Federal Tax Authority. With proper tax compliance, PRO services, and awareness about changes due to be implemented by 2025, tax fines can be reduced, and business strategy can be enhanced. Whether you are in the process of setting up a company in Dubai or in the process of acquiring a UAE Golden Visa, these statistics allow you to confidently navigate the world of taxation, enabling your business to remain competitive and enabling the economy to continue to establish sustainable growth.
