Corporate Tax vs VAT in UAE – What’s the Difference?

“Synopsis”

Understanding the difference between corporate tax and Value Added Tax (VAT) is crucial for businesses in the UAE. Both taxes impact financial planning and compliance, but they serve different purposes. While corporate tax applies to business profits, VAT is a consumption tax levied on goods and services. This blog explains their key distinctions, tax rates, exemptions, and compliance requirements.

Since the introduction of corporate tax and VAT in the UAE, businesses must comply with taxation regulations set by the Federal Tax Authority (FTA). Knowing how these taxes work helps organizations plan effectively while minimizing liabilities.

Key Differences Between Corporate Tax and VAT

1. Purpose of Each Tax

• Corporate Tax: Levied on a company’s net profits, ensuring contributions to public revenue.
• VAT: An indirect consumption tax charged on sales transactions at different stages of supply chains.

2. Tax Rates & Applicability

• Corporate Tax:
  • 0% tax for income below AED 375,000
  • 9% tax for income above AED 375,000
  • 15% tax for multinational corporations under OECD guidelines
• VAT:
  • Fixed 5% VAT rate applies to most goods and services
  • Certain goods/services qualify for zero-rated VAT (exports, education, healthcare)

3. Taxpayer Responsibility

• Corporate Tax: Businesses pay tax on their profits, requiring proper accounting and annual tax filings.
• VAT: Businesses collect VAT from customers and remit it to the FTA during tax filings.

4. Exemptions & Special Categories

• Corporate Tax Exemptions:
  • Free zone businesses (subject to regulations)
  • Government-owned entities
  • Charitable organizations
  • Natural resource extraction industries
• VAT Exemptions:
  • Residential property rentals
  • Life insurance services
  • Local passenger transport

Compliance & Filing Requirements

Corporate Tax Compliance

• Businesses must register with FTA and obtain a Tax Registration Number (TRN).
• Annual corporate tax filings are required through the FTA portal.
• Proper financial records and tax deductions must be maintained.

VAT Compliance

• VAT registration is mandatory for businesses exceeding AED 375,000 annual revenue.
• VAT returns must be filed quarterly or monthly, depending on business activity.
• Companies must provide VAT-compliant invoices to customers.

Conclusion

Both corporate tax and VAT play essential roles in UAE taxation policies. While corporate tax is levied on business profits, VAT is a consumption-based tax collected from customers. Understanding the differences between these taxes ensures financial compliance, smooth operations, and tax optimization for businesses in the UAE.