Taxes play a crucial role in the financial landscape of any country, and the United Arab Emirates is no exception. Two key taxes that business owners need to be aware of in the UAE are Value Added Tax (VAT) and corporate tax. While VAT applies to the goods and services people buy, corporate tax is focused on the profits businesses make.
If you're thinking about starting or expanding your business in the UAE, it's essential to understand how these taxes work. Knowing the difference between VAT and corporate tax in UAE can help you stay on the right side of the law and make smarter financial decisions.
So, let’s understand the main differences between VAT and corporate tax in a simple way, so you can easily navigate the tax rules in the UAE.
What is VAT in the UAE?
Value Added Tax (VAT) is a consumption tax that is added to the price of goods and services at each stage of production or distribution. Essentially, VAT is charged on the value added to a product or service as it moves through the supply chain, from the manufacturer to the retailer. Businesses collect this tax on behalf of the government and pass it along to the tax authorities.
How VAT is Applied in the UAE:
VAT in UAE was introduced on January 1, 2018, as part of the government's efforts to diversify its revenue sources. VAT is charged on most goods and services, except for a few exempt items, such as healthcare, education, and some financial services. The tax is typically added at the point of sale, meaning consumers pay VAT when they purchase goods or services, and businesses collect the tax.
VAT Rate in the UAE:
- Standard rate: The standard VAT rate in the UAE is 5%, which is relatively low compared to many other countries around the world.
- Zero-Rated Supplies: Some goods and services are zero-rated, meaning no VAT is charged but businesses can still claim input tax credits. Examples include exports and international transport.
- Exempt Supplies: Some supplies are exempt from VAT, meaning no VAT is charged and businesses cannot claim input tax credits. Examples include basic food items, healthcare, and education.
VAT Registration in the UAE:
Businesses in the UAE must register for VAT if their annual taxable supplies exceed a certain threshold. The registration thresholds are:
- AED 375,000 for businesses making taxable supplies (i.e., selling goods or services that are subject to VAT).
- Businesses with taxable supplies between AED 187,500 and AED 375,000 can opt for voluntary registration.
- If a business's turnover is below AED 187,500, VAT registration is not required, but the business can choose to register voluntarily.
Examples of Businesses Required to Register for VAT in UAE:
- Retail Businesses: Shops selling physical goods, from electronics to clothing, must register for VAT if their annual sales exceed the registration threshold.
- Service Providers: Companies offering services such as consulting, marketing, and IT services must also register for VAT once their taxable supplies reach the required amount.
- Construction and Real Estate Companies: Builders, developers, and real estate agents engaged in buying, selling, and leasing properties must register for VAT if their revenue exceeds the threshold.
- Importers: Businesses involved in importing goods into the UAE from outside the country are also required to register for VAT, as the tax is applied to imports.
What is Corporate Tax in the UAE?
Corporate tax is a tax that businesses pay on their profits. Unlike VAT, which is a consumption tax applied to goods and services, corporate tax is charged directly on the income a business generates. It is a key form of tax levied on companies and organizations operating within a country. The UAE introduced corporate tax on business profits starting June 2023, marking a major shift in its tax system.
Corporate Tax Rates in the UAE:
The corporate tax rates in the UAE vary based on the level of taxable income:- 0% Tax Rate: Businesses with annual profits up to AED 375,000 are exempt from paying corporate tax. This is designed to help small and medium-sized enterprises (SMEs) thrive without the burden of tax.
- 9% Tax Rate: Businesses earning profits above AED 375,000 are subject to a corporate tax rate of 9%. This is applicable to most companies in the UAE.
How Corporate Tax is Calculated:
Corporate tax is calculated based on a business's taxable income, which is the net profit earned after deducting eligible business expenses from the total revenue. Here's how it works:- Total Revenue: The income generated from the sale of goods, services, and any other sources of business income.
- Business Expenses: These include operating costs, salaries, rent, utilities, and other legitimate expenses incurred by the business to generate income.
- Taxable Income: The taxable income is what remains after deducting the business expenses from total revenue.
- Corporate Tax Calculation: The corporate tax is then applied to this taxable income, based on the relevant tax rate (e.g., 9% for profits exceeding AED 375,000).
Businesses Subject to Corporate Tax in UAE:
- Profit Threshold: Corporate tax applies to businesses with annual profits exceeding AED 375,000. Businesses with profits below this threshold are exempt from corporate tax.
- UAE-based and Foreign Companies: Both local and foreign companies operating in the UAE are subject to corporate tax if they meet the income threshold.
- Free Zone Companies: Certain Free Zone companies may be eligible for tax exemptions, provided they meet specific criteria and engage in qualifying activities.
- Oil and Gas Sector & Banking Sector: The UAE has separate tax rules for companies in these sectors, and they may be subject to higher tax rates.
Key Differences Between VAT and Corporate Tax in the UAE
While both taxes serve as sources of government revenue, they differ significantly in their application, purpose, and who bears the tax burden. Here is the key difference between VAT and Corporate Tax in the UAE:
| Aspect | VAT (Value Added Tax) | Corporate Tax |
| Definition | A consumption tax applied to goods and services. | A tax on the net profits earned by businesses. |
| Nature of Tax | Indirect tax collected by businesses on behalf of the government. | Direct tax paid by businesses on their taxable income. |
| Applicable To | Most goods and services sold or consumed in the UAE. | Businesses with annual profits exceeding AED 375,000. |
| Tax Rate | 5% on taxable goods and services. | 0% for profits up to AED 375,000; 9% for profits above AED 375,000. |
| Who Pays the Tax | Consumers ultimately bear the tax; businesses collect and remit it. | Businesses pay the tax based on their profits. |
| Tax Filing Frequency | Monthly or quarterly VAT returns. | Annual corporate tax returns. |
| Calculation Basis | Based on the value added to goods or services. | Based on taxable income (revenue minus expenses). |
| Exemptions | Some sectors like healthcare, education, and financial services. | Free Zone companies with qualifying activities and SMEs with profits below AED 375,000. |
| Purpose | A revenue source from consumption to diversify government income. | Aligns with global tax standards and generates government revenue from business profits. |
Simplify Your Tax and Business Journey with Shuraa
VAT and corporate tax both play an important role in how businesses operate in the UAE. While VAT in UAE affects the cost of goods and services for customers, corporate tax directly impacts a company’s profits. Understanding these taxes is essential for businesses to stay compliant and manage their finances effectively. With proper tax planning, businesses can reduce their tax burden and focus on growing their operations.
At Shuraa Business Setup, we’re here to make things easier for you. Our team of experts, including business consultants, legal advisors, and PRO executives, can handle all your business setup and tax-related needs in the UAE. Whether you already have a business or are planning to start one, we’re ready to help. Contact us today and let us make your journey in the UAE smooth and stress-free.
