What is the Difference Between VAT and Corporate Tax in UAE?

In June 2023, the Federal Corporate Tax (CT) was put in place. This was a big change for business in the United Arab Emirates. Companies were mostly familiar with the Value-Added Tax (VAT) system, which was put in place in 2018, for many years. As of now, both taxes are in force, so it’s vital to know their roles, how they work, and what you need to do to be compliant. This blog explains the main difference between VAT and Corporate Tax in UAE. Let’s get started: 

VAT and Corporate Tax: Key Differences in Ideas

The main difference is in the types of taxes that are used.

1. VAT: You don’t directly pay Value Added Tax (VAT) when you buy something. At every link in the supply chain, it is added to the cost of getting things and services to people. Importantly, the end customer is the one who has to pay for VAT in the end. Businesses in the  UAE collect taxes for the government by adding VAT (output tax) to the things they sell and getting back the VAT (input tax) they paid on business costs. The Federal Tax Authority (FTA) either gets the net difference or gives it back to you.
2. Corporate Tax: The Corporate Tax (CT) is a tax that is straight on top of income. It is directly taken out of the net profit or taxed income of companies operating in the UAE for a certain time period. There is only one company responsible for this, and users cannot be charged for it like they can with VAT. It is a tax on how well the company’s business profits do financially, measured by taking revenue less allowable costs.

The Governing Body And The Legal Framework of Both UAE Corporate Taxes

Both taxes are based on federal law set  by the UAE government, but they are controlled by different pieces of legislation and, to some extent, different agencies.

1. VAT: Federal Decree-Law No. (8) of 2017 on VAT and its executive orders set the rules for VAT. There is only one group that can handle management, collection, and enforcement: the Federal Tax Authority (FTA).
2. Corporate Tax (CT): The Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses operating in the UAE, and the decisions that came with it set the rules for corporate tax. Even though the FTA is also in charge of running CT, the law creates the idea of a different Corporate Tax arm within the FTA to make its separate operational footprint stand out.

Taxable People and Minimum Registration Requirements

There are a lot of different rules about who needs to register and pay corporate tax and VAT.

For Value Added Tax:

• If a business’s taxable goods and supplies total more than AED 375,000* a year, it has to register and pay the suitable VAT rate.
• If your annual supplies of goods and services are more than AED 187,500*, you can choose to register voluntarily.
• It mostly affects companies that sell taxed goods and services, but there are some exceptions and special rules for UAE Free Zone Persons.

For Corporate Tax in the UAE:

• The range is based on taxed income, not on sales. For taxable income up to AED 375,000*, a 0% CT rate is a big help for new businesses and startups.
• The UAE tax laws affect companies based in the UAE as well as foreign companies with a permanent presence in the UAE. Importantly, Free Zone Persons can get a 0% CT rate on qualifying income as long as they keep up enough content and follow the rules. This is a very important thing for Free Zone entities to think about.
• The corporate tax applies to people who are running a business with a commercial license.

Difference Between VAT and Corporate Tax Base: What is Being Taxed?

The difference between VAT and corporate tax in UAE involves a difference in behavior that has a direct effect on how accounting is done.

1. VAT Base: The tax is based on the amount of the taxable supply, which is usually the price at which a good or service is sold. Keeping track of VAT on sales (output) and buying (input) is what compliance is all about.
2. Corporate Tax Base: The tax is a direct tax and is based on the taxable income, which is levied on the profits shown in the financial records after certain CT allowances and disallowances are taken into account. Some of these changes are adding back costs that aren’t tax-deductible, like fines and some penalties, and taking away income that isn’t tax-deductible. To do this, the management accounts and the tax calculations need to be matched up.

Understanding VAT and Corporate Tax Rates That Apply

The corporate tax and value added tax rate systems are easy to understand.

1. VAT: The standard rate of VAT in the UAE is 5%*, but it is 0% for some goods and services that are exempt from VAT, like exports, and it’s not charged at all for some goods and services, like private real estate.
2. CT: The law sets the rate for corporate tax at 9%*. As was already said, the annual tax rate is 0% for taxed income up to AED 375,000*. The tax rate on qualifying income is 0% for people who live in an eligible free zone.

Procedures for Compliance and Filing for UAE VAT and Corporate Tax

The work and deadlines for administration are different.

1. VAT: VAT compliance happens a lot. Most of the time, businesses have to file their VAT returns every three months or once a month within 28 days of the end of the tax period. This means giving information about total sales, output VAT, total purchases, and input VAT.
2. CT: Annually, corporations must follow more complicated corporate taxation rules. Every year, businesses have to make a single Corporate Tax filing return within 9 months of the end of their relevant financial period. This step goes hand-in-hand with audited or financial records and includes giving full information about income, deductions, and tax calculations.

Business Implications for Corporate Tax and VAT: What You Need to Know

1. Different Calculations for Different Liabilities: Both taxes can be due at the same time by the same company, but they are calculated separately. Having a VAT liability does not mean you have a CT liability, and the other way around. Companies that make money may only have a small net VAT liability, while companies that lose money may still have to collect and file VAT.
2. Cash Flow Management: VAT has a direct and regular effect on cash flow because the tax that is collected has to be sent to the FTA daily. CT is a yearly liability on profits that needs careful planning of the cash reserve. 
3. Input VAT Recovery vs. CT Deductibility: You can’t always get back the VAT you pay (input tax), like when you spend money on entertainment. In the same way, even if VAT could be recovered on an expense, that expense may not be fully deductible for CT reasons (for example, different methods of depreciation apply). Parallel tracking is needed for this.
4. Documentation and Record-Keeping: For both VAT and CT files, businesses must keep good records. The FTA says that records must be kept for 5 years for VAT and 7 years for Corporate Tax after the end of the tax period.
5. Free Zone Strategic Advantage: The CT rule makes the offer even more appealing for people who qualify for the free zone. Businesses in free zones need to carefully look at what they do to make sure they make enough money to qualify for the 0% CT rate and still follow VAT rules on their goods.

In conclusion,

The coexistence of VAT and Corporate Tax in the UAE demonstrates that the country’s tax system is well-developed and stable. Businesses need to know that these two parts of the tax system are different to navigate this landscape successfully. To ensure correct compliance, get the best tax positions, and stay away from penalties, people need to be involved, plan ahead, and often talk to tax advisors. Xpert Tax & Accounting is one such name in the industry that offers great guidance on navigating the complex tax system in the UAE. Call our experts and get a free consultation today! 

By understanding the difference between VAT and corporate tax in UAE, companies in the UAE can turn following the rules into a competitive advantage, making sure their operations are both efficient and in line with the country’s growing economic vision. 

FAQS

If We Sign Up For VAT, Does That Mean We Also Have To Sign Up For Corporate Tax?

No, registering for VAT and Corporate Tax are two different steps with different requirements. Each business must decide for itself if it meets the requirements for each one.

In The UAE, Can Losses From One Business Action Be Used To Lower The Amount Of Taxable Income From Another?

Yes, under certain conditions and grouping rules, the UAE CT system usually lets a person who is taxed use losses from one business activity to offset gains from another business activity.

What Are The Fines For Registering For Corporate Tax Late? Are They The Same As Those For VAT?

There are fines from the Federal Tax Authority for registering late for Corporate Tax. These fines are different from and in addition to any fines for registering late for VAT.