The UAE is a popular destination for businesses looking to set up operations, but it has its own set of rules and regulations. As a business owner, it is important to understand the local laws, including the taxes your company must pay while operating in the UAE.
Two key taxes that businesses in the UAE need to be aware of are corporate tax and VAT. These taxes are crucial for generating revenue, but they work in different ways and impact the economy and society. In this blog, we will explain what these taxes are and highlight the difference between VAT and tax. So, let us get started!
Understanding VAT and corporate tax in the UAE
To understand the main differences between VAT tax in UAE, let us first explain what each tax means according to the law:
- VAT (Value-Added Tax): This is a tax placed on the sale and import of goods and services at every step of the supply process, including when goods are supplied within the country. Essentially, it applies whenever goods or services are bought or sold.
- Corporate tax: This tax is charged on the income or profits that a business makes. It applies to the earnings of companies and other legal entities.
Simply put, value added tax UAE is a tax on the sale and purchase of goods and services throughout the supply chain. Corporate taxation in UAE, on the other hand, is a tax on the income a business earns.
Corporate tax
Businesses in the UAE did not have to pay corporate tax in the past, but this is changing. The UAE government has introduced a federal tax on business profits. On December 9, 2022, the Federal Tax Authority issued the Corporate Tax Decree Law.
The purpose of this new tax is to shift the UAE’s economy away from relying mainly on oil and towards other sources of income. By investing in technology and innovation and introducing a corporate tax, the government is creating a more diversified economy. This tax will help increase the country’s revenues beyond just oil profits.
Corporation tax UAE is based on the profits of a business. The standard corporate tax rate in Dubai is 9% for businesses that make more than AED 375,000 in profit. The tax does not directly affect customers but applies to the business’s profits.
The corporate tax applies to all business activities across the UAE, except the following:
- Companies involved in natural resource extraction are taxed by the emirates where they operate.
- Individuals earning personal income, such as salaries or investment profits, are not required to pay corporate tax.
- Businesses in free zones are exempt from the corporate tax.
Here is what you need to know about the new corporation tax UAE rates:
- A 0% tax rate applies to taxable income up to AED 375,000.
- A 9% tax rate applies to taxable income above AED 375,000.
- Multinational enterprises (MNEs) under the OECD’s BEPS 2.0 rules will be subject to additional tax guidelines.
In addition to these exemptions, the corporate taxation in UAE law also includes further exclusions, such as:
- Dividends earned from UAE companies.
- Profits from transactions within a company group.
- Dividends earned from foreign companies.
- Profits from group reorganizations.
This new tax system is part of the UAE’s strategy to diversify its economy and reduce reliance on oil.
Value Added Tax (VAT)
Value added tax UAE is a tax on the consumption of goods and services. It is charged at each step of production and distribution. VAT is widely used around the world, and over 150 countries have adopted it. In the UAE, VAT was introduced on January 1, 2018, at a rate of 5%.
For businesses, like logistics companies, value added tax in UAE affects cash flow because they must collect tax on their sales and offset it with the tax paid on their purchases. VAT is a general tax on consumption, meaning it applies to most goods and services. Businesses must register for VAT if their taxable sales and imports exceed AED 375,000.
If a business operates in a UAE-free zone, its transactions are not subject to VAT and are tax-free. Before VAT, the UAE only had taxes on specific industries, like oil & gas and banking, which did not affect all businesses. However, VAT has now impacted every business in the country and has changed the business environment.
At the end of each tax period, businesses registered for VAT must submit a VAT return to the Federal Tax Authority (FTA). This tax provides the government with extra revenue to fund its various projects and initiatives.
While value added tax UAE is applied to most goods and services, some products and services are exempt or charged at a 0% rate. These include:
- Bare land
- Some financial services (as outlined in value added tax in UAE legislation)
- Residential properties
- Local passenger transport
Simply put, value added tax in UAE is a tax businesses charge on goods and services, with some exemptions for specific sectors. It is ultimately paid by customers and directly affects them by raising the prices of goods and services in the UAE. Although the VAT rate is 5%, tourists can claim back 85% of the VAT they paid on products purchased in the UAE.
What are the key differences between VAT and corporate tax?
|
Points of Distinction |
VAT |
Corporate Tax |
|
Nature of tax |
Consumption-based tax |
Profit-based tax |
|
Who pays the tax |
Paid by customers for goods and services |
Paid by companies on their profits, affecting shareholders, customers and employees |
|
Calculation method |
Calculated by adding value at each stage of production |
Calculated on the profits a company makes |
|
Tax filing and payment |
Businesses charge VAT and remit it to the FTA |
Companies file taxes and pay on their profits |
|
Tax collection |
Collected at each stage of the supply chain; businesses charge VAT on sales and reclaim VAT on purchases |
Paid by businesses annually based on their taxable income |
|
Impact on pricing |
VAT is added to the final price of goods and services, affecting the final price directly |
Corporate tax does not directly affect pricing but can influence pricing strategies through cost management and profit margins |
Conclusion
VAT and corporation tax UAE are important for generating government revenue. Both businesses and consumers need to understand how these taxes affect the economy and society. By understanding the points discussed in this blog, we can better see how each tax shapes the UAE’s economic environment.
At Asad Abbas & Co. (Chartered Accountants), we are proud to be your trusted guide in managing taxes and accounting in the UAE. Our team of experts is well-versed in UAE tax laws and regulations, and we offer customized solutions to meet your needs. Partner with us today and see the difference for yourself!
