How Is Corporate Tax Different From VAT In UAE?
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How Is Corporate Tax Different From VAT In UAE?
The UAE, a thriving hub for businesses and global commerce, has its own set of rules and regulations that businesses need to understand to operate efficiently. Among these are corporate tax and value-added tax (VAT), two important components of the UAE’s tax landscape. Here, we aim to clarify the meaning and differences between these taxes to help business owners navigate the tax system effectively.
Corporate Tax
Historically, the UAE did not levy corporate tax on businesses. However, this changed with the introduction of a federal tax on business profits. On December 9, 2022, the Federal Tax Authority issued the Corporate Tax Decree Law. This move is part of the UAE government’s strategy to transition from an oil-reliant economy to a diversified one.
Scope and Exemptions:
Applicability:
- Applies to all commercial and business activities in the UAE.
- Businesses operating in free zones are exempt, provided they meet regulatory requirements and do not conduct business on the mainland.
- Businesses involved in natural resource extraction fall under emirate-based taxation norms.
- Individuals earning income in a personal capacity, such as salaries or investment gains, are exempt unless a commercial license is required.
Further Exemptions:
- Profits from intra-group transactions and group reorganizations.
- Dividends earned from UAE and foreign companies.
Tax Rates:
- 0%: Taxable income up to AED 375,000.
- 9%: Taxable income above AED 375,000.
- Multinational enterprises (MNEs) under Pillar 2 of the BEPS 2.0 framework (global revenues exceeding AED 3.15 billion) are subject to the OECD’s Base Erosion and Profit-Sharing Rules.
Value Added Tax (VAT)
Introduced on January 1, 2018, VAT is a consumption-based tax applied to the majority of goods and services transactions in the UAE. VAT is levied at a standard rate of 5%.
Scope and Exemptions:
- Businesses must register for VAT if their taxable supplies and imports exceed AED 375,000 annually.
- Trade in free zones is generally exempt from VAT.
VAT exemptions apply to:
- Certain financial services.
- Residential properties.
- Bare land.
- Local passenger transport.
Compliance: Businesses registered for VAT must charge VAT on taxable goods and services, file periodic VAT returns, and remit the tax to the Federal Tax Authority (FTA).
Key Differences Between Corporate Tax and VAT
Nature of the Tax:
- Corporate tax is profit-based, whereas VAT is consumption-based.
Taxpayer Responsibility:
- Corporate tax is paid by companies on their profits.
- VAT is borne by consumers and collected by businesses, which then remit it to the FTA.
Calculation:
- Corporate tax is calculated on profits.
- VAT is calculated on the value added at each stage of production or distribution.
Filing Requirements:
- Corporate tax requires businesses to file taxes and pay on profits.
- VAT requires businesses to charge tax, file returns, and transfer collected amounts to the FTA.
Conclusion
Understanding the differences between corporate tax and VAT is crucial for businesses operating in the UAE. While corporate tax is charged on profits, VAT is levied on the consumption of goods and services. Navigating these taxes effectively can enhance business efficiency and compliance.
How Can AH Management Consultancy Assist You?
At AH Management Consultancy, we specialize in providing comprehensive tax advisory services tailored to meet your needs. Our team of experienced professionals is well-versed in UAE’s corporate tax and VAT laws, offering personalized solutions to help your business comply with regulations and optimize tax benefits.
Our Services Include:
- Corporate tax planning and implementation.
- VAT registration and filing.
- Tax consultations to avoid penalties and ensure compliance.
Partner with us to streamline your tax processes and focus on your business growth. Contact our team today to learn more about how we can support your business.