In short, not anymore, those days are unfortunately over. However, the UAE still offers a low tax environment with reasonable compliance requirements and attractive tax incentives.
This article is essential for anyone who wants to understand the UAE tax system and how it effects businesses and freelancers. It explains tax rates, VAT, and future changes clearly, making it useful for both new and existing business owners and freelancers in the UAE.
VAT (Value Added Tax) vs Corporate Tax in the UAE: A Guide for Business Owners
The UAE offers strong opportunities for businesses, but it operates under specific legal and regulatory requirements. Business owners must be familiar with local laws, including company tax obligations.
Companies operating in the UAE should have a clear understanding of VAT and corporate tax.
Describe the UAE’s Corporate Tax and Value Added Tax (VAT)
It is useful to first define each tax as specified by law in order to understand the main distinctions between corporate tax and VAT (value-added tax) in the United Arab Emirates.
- VAT (Value Added Tax) is imposed on the import and sale of goods and services at each stage of the supply chain, including domestic transactions. To put it simply, it is imposed each time goods or services are purchased or sold.
- A business’s income or earnings are subject to corporate tax. It includes the profits made by businesses and other legal entities that operate in the United Arab Emirates.
To put it briefly, corporate tax in the United Arab Emirates concentrates on a company’s revenue, whereas value-added tax, or VAT, taxes the sale and purchase of goods and services across the supply chain.
VAT (Value Added Tax)
The UAE introduced VAT on January 1, 2018, with a fixed rate of 5%.
For businesses such as logistics companies, VAT in the UAE directly impacts cash flow because they collect VAT on sales and recover the tax paid on purchases. As a broad-based consumption tax, VAT applies to most goods and services. Businesses must register for VAT when their taxable supplies and imports exceed AED 375,000.
When a business operates in a UAE free Zone, its transactions remain outside the scope of VAT and are generally tax-free. Before the introduction of VAT, the UAE imposed taxes only on certain sectors, such as oil and gas and banking, which meant most businesses were not affected. VAT has since transformed the businesses across the country.
At the end of each tax period, VAT registered businesses must file a VAT return with the Federal Tax Authority (FTA). VAT enables the government to generate additional revenue to support public projects and national initiatives.
Although VAT in the UAE applies to most goods and services, the law exempts certain products and applies a 0% rate to others.
These include:
- Local Passenger Transport
- Bare Land
- Residential Properties
- Certain Financial Services ( as defined in UAE VAT legislation)
In simple terms, Vat in the UAE is a tax that businesses charge on goods and services, with specific exemptions for certain sectors. Customers ultimately bear the cost, as VAT increases the prices of goods and services across the country. Although the standard VAT rate is 5%, tourists can reclaim up to 85% of the VAT paid on eligible purchases in the UAE.
CT (Corporate Tax)
In the past, businesses in the UAE did not pay corporate tax, but this situation has now changed. The UAE government has introduced a federal corporate tax on business profits, and the Federal Tax Authority issued the Corporate Tax Decree Law on December 9, 2022.
The government introduced this tax to reduce the country’s dependence on oil and strengthen other sources of income. By investing in technology & innovation and applying corporate tax, the UAE aims to build a more diversified and sustainable economy. This approach will help increase national revenue beyond oil-related earnings.
Corporate tax in the UAE applies to a company’s profits. In Dubai, businesses pay a standard corporate tax rate 9% when their profits exceed AED 375,000. This tax affects business profits only and does not directly impact customers.
Corporate Tax Applies to all UAE Businesses, Except These
- Emirate-level authorities tax companies that extract natural resources in the regions where they operate.
- Individuals do not pay corporate tax on personal income, including salaries and investment returns.
- Free zone businesses qualify for exemption from UAE corporate tax.
Everything you need to know about the New UAE Corporate Tax Rates
- A 0% Corporate tax rate on taxable income up to AED 375,000.
- A 9% Corporate tax rate on taxable income above AED 375,000.
- Multinational enterprises (MNEs) must follow additional tax rules under the OECD’s BEPS 2.0 framework.
Along with these thresholds, the UAE Corporate Tax Law also allows several exclusions, including
- Dividends received from UAE-based companies.
- Profits earned from transactions within the same corporate group.
- Dividend received from foreign companies.
- Profits generated from group restructuring activities.
The UAE introduced this corporate tax system to diversify its economy and reduce its dependence on oil revenues.
Key difference between VAT and Corporate Tax
| Key Differences | VAT | Corporate Tax |
| Types of Tax | A tax based on consumption | A tax based on company profits |
| Taxpayer | Customer pay it when they buy goods and services | Companies pay it from their profits, and it can impact shareholders, customers, and employees |
| How the Tax is calculated | Each business calculates it on the value it adds at every production stage | Business calculate it using the profit they earn |
| Tax return and payment process | Business collect VAT from customers and pay it to the FTA | Companies file tax returns and pay tax on their profits |
| Method of Tax Collection | VAT is collected throughout the supply chain, where businesses charge VAT on sales and claim back VAT on purchases | Businesses pay corporate tax each year based on their taxable income |
| Effect on Prices | VAT increases the final price of goods and services and directly affects cu customers | Corporate tax does not directly change prices, but it can influence pricing decisions through cost control and profit planning |
Conclusion
VAT and corporate tax play a vital role in generating government revenue in the UAE. Businesses and consumers must understand how these taxes influence the economy and society.
The discussion in this blog helps explain how each tax contributes to shaping the UAE’s economic landscape.
