Demystifying UAE Taxes: Breaking Down the Difference Between UAE Corporate Tax and VAT

As part of the UAE’s evolving fiscal landscape, the country has rolled out two important taxes: Value Added Tax (VAT) implemented in January 2018 and Corporate Tax (CT) effective from June 2023, each playing a vital role in enhancing economic sustainability and reducing reliance on oil revenues. Value Added Tax, launched in 2018, is a consumption tax on goods and services.  Corporate tax, introduced in 2023, applies to business profits above a set threshold, signaling a shift from the UAE’s traditional tax-free model. Each tax has a different purpose and compliance procedure. It is crucial for businesses, no matter whether it is SMEs, Free zone entries, to understand the difference between UAE VAT and Corporate Tax in order to stay compliant.

There may be many questions that arise in your mind: Do I have to pay both Corporate Tax and VAT, or how will it affect business, or what does it mean for compliance? If these remain a question mark, this guide will make things clear. We will break down the difference between UAE VAT and corporate tax, helping businesses to navigate the evolving tax landscape.

Understanding VAT in the UAE

Effective since January 1, 2018, Value Added Tax in the UAE is a consumption-based tax applied at each step of the supply chain. The standard rate VAT is 5% in the UAE. This tax was implemented as part of the UAE  government’s strategy to generate additional revenue to fund public services and infrastructure, while aiming to reduce reliance on oil revenues.

Exploring the Scope of VAT in the UAE

UAE VAT is a multi stage consumption tax applied to most goods and services, covering both imports and exports. It is collected at every point in the production and distribution chain from raw material phase to final consumers.

The Scope of VAT in the UAE:

• Domestic Goods and Services Within the UAE
• Goods and Services Imported into the UAE
• International Exports from the UAE (Zero Rate)

UAE VAT Tax Rate and Registration Guidelines

The VAT standard rate is 5%, and certain goods and services are zero-rated or exempt from VAT.

• Zero-rated supplies: Exports, international transportation, and some other healthcare and education services are zero-rated (meaning they are subject to 0% VAT), and related input VAT on expenses is claimable.
• Exempt supplies: Some financial services, local transport services, and real estate activities are exempt from VAT (meaning no VAT), but VAT on expenses is not recoverable as well against any of these exempt supplies.

VAT Compliance & Registration in UAE: Businesses with a total revenue above AED 375,000 annually must register for VAT in the UAE. However, businesses with a turnover between AED 187500 and AED 375000 can opt to register for VAT voluntarily.

UAE VAT Return Timeline and Payment Process

Businesses with UAE VAT registration must file VAT returns in the UAE and settle payments with the UAE FTA every quarter. The deadline for submitting VAT return in UAE and making payments is 28th day of the month following the tax period end.

• Example of Tax Periods and due dates:

Q1: January – March – due date April 28th

Q2: April – June  – due date July 28th

Q3: July – September – due date October 28th

Q4: October – December – due date January 28th

• Submission Platform: First, log in with the EmaraTax portal and file your return.
• Make Payment: settle VAT liability through online or recognized banks, or exchange houses.

Overview of UAE Corporate Tax

Corporate tax in the UAE is the federal tax levied on the taxable income of the business. It is introduced as part of the country’s shift towards global tax standards. It was officially introduced in January 2022, and became effective for the financial year starting on or after June 1, 2023.

Overview of UAE Corporate Tax Applicability

Corporate Tax in the UAE is imposed on a variety of business types, such as:

• UAE-incorporated companies
• Branches of foreign entities operating in the UAE
• Free zone entities (subject to specific conditions and exemptions)
• Sole proprietorships and partnerships engaged in business activities
• Natural persons carrying on business activities

Taxable elements include:

• Net business income
• Profits from commercial operations
• Capital gains, unless specifically exempt

UAE Corporate Tax Compliance: Rate Slabs and Registration Rules

The UAE corporate tax is set at a standard rate of 9% on business profits. Thus,

• Eligible startups and small businesses with revenue under AED 375000 can get a tax relief at a rate of 0%.
• Multinational companies with an annual turnover of EUR 750 million will be taxed at 15% minimum top up corporate tax under the OECD’s Pillar Two norms.
• UAE corporate tax registration is mandatory for all legal entities (LLC, Free Zone Companies etc.). For Natural Persons carrying on business registration is mandatory only of the annual revenue exceeds AED 1 million.

Filing UAE Corporate Tax Return and Payment Guidelines

It is mandatory for businesses in the UAE to file Corporate tax returns and make payments to the UAE’s FTA, following the deadline specified by the UAE FTA.

• Tax filing cycle: Corresponds to the business’s fiscal year cycle. File corporate tax return within 9 months after the financial year ends. Late filing may lead to penalties.
• UAE Corporate Tax Returns: To be completed online via the EmaraTax portal
• Payments: Can be made electronically or recognised authorized banks and financial partners.

UAE VAT & Corporate Tax Rules: Free Zone Companies in the UAE

Free Zone businesses in the UAE must register for VAT if their turnover exceeds AED 375,000.

They may enjoy a 0% UAE Corporate Tax rate if they meet Qualifying Free Zone Person criteria, such as carry on only qualifying activities, conduct yearly audits etc. Otherwise, the 9% rate applies.

Final Thoughts

Jaxa Chartered Accountants is an established and well-respected accounting and taxation firm throughout the UAE and Dubai. We are a multidisciplinary firm in the UAE offering a multitude of financial services, including corporate tax, VAT, accounting and bookkeeping, and audit and assurance. We have over 18 years of experience serving businesses of all types, including Free Zone companies and start-ups, to fully comply with UAE tax laws.

Our team of seasoned, certified accountants, auditors, and consultants in the

UAE specializes in simplifying the complexities of UAE VAT and corporate tax compliance. As a UAE FTA-registered tax agent, Jaxa provides expert guidance to help you meet your UAE VAT and Corporate Tax obligations.

Book a Free Consultation Now and partner with Jaxa. Let our team assist you in managing your UAE VAT and Corporate Tax compliance with ease.