If you have an entity in the UAE or you are planning to set up one, you’ve probably heard a lot about taxes. The UAE has introduced Corporate Tax (CT) and has implemented Value Added Tax (VAT) for a while now. But what are these taxes, and how do they differ?

What is Corporate Tax?

Corporate Tax is a tax levied on a company’s taxable profits. In other words, if your business is generating a profit, you’ll likely need to pay corporate tax on the taxable profits your company earns.

As of 2023, the UAE introduced a 9% corporate tax for businesses with profits exceeding AED 375,000. If your firm is earning below that, you do not need to pay corporate tax, but you still need to file a corporate tax return. Once your taxable profit exceeds AED375,000, you are required to file and pay taxes based on your taxable profit.

For example, your business’s accounting profit is AED 100,000, and the taxable profit is AED 500,000. Your tax is as below.

1. First AED 375,0000 of your taxable profit at the rate of Zero %, and
2. The profit exceeds AED 375,000 at a rate of 9%, so the due corporate tax on AED 125,000 is AED 11,250.

Contact us to learn about the difference between accounting profit and taxable profit and how to calculate the taxable profit.

If you have difficulties auditing your financial records, computing your taxable income, or registering for corporate tax, we are ready to provide any support you and your business need. We have years of experience providing various financial services to different companies across industries in the UAE.

What is Value Added Tax?

On the other hand, Value Added Tax is a tax on goods or services that is added on the price when you buy something or avail of a service. The set VAT in the UAE is at 5%. It’s like a sales tax, but businesses and companies collect them and pay them back to the government.

So, for example, if you buy a product worth AED 100, you’ll pay AED 5 in VAT, so the company selling the product will adjust the price to AED 105. They then collect that VAT and pay it to the government.

Key Differences Between Corporate Tax and Value-Added Tax

1. Who pays it?

Corporate Tax: Businesses pay corporate tax depending on their taxable Income.

VAT: Customers pay value-added tax when buying goods and services. Businesses collect this tax from their clients and pay it to the government.

1. How is it calculated?

Corporate Tax: Based on taxable income (and exceeded AED 375,000 @ the rate of 9%).

VAT: Based on the price of the product or service. If a product price is AED 100, the VAT is 5% of AED 100, which is AED 5.

1. Who is responsible?

Corporate tax: The business owner or the company is responsible for paying corporate tax.

VAT: The customer pays the VAT, but the business is responsible for passing it to the government.

1. Are there any exceptions?

Corporate tax: If the business’s taxable income is below AED 375,000, the company is exempt from paying corporate tax.

VAT: Certain goods and services may be exempt from VAT such as domestic transport, healthcare, education, and financial services.

How Do They Affect Your Business?

As a business owner, you need to be concerned about both corporate tax and VAT, especially if you’re selling goods or services. When calculating your profit, you need to keep track of your earnings and expenses to determine if you need to pay tax or not.

If you’re selling goods or providing services, you need to charge your customers with the proper tax rate, to ensure you’re collecting and paying the correct amount.

Corporate Tax and Value Added Tax are both important parts of the tax system in the UAE but affect businesses in different ways. Understanding and knowing the difference between the two is key to staying compliant and making sure that you do not owe the government any taxes.

If you need help in filing your corporate tax or VAT return, do not hesitate to reach out to professional accountants, auditors, and tax consultants. Get in touch with our professional team today for expert advice and assistance with your corporate tax and value-added tax. 

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Reference: https://www.finanshels.com/blog/vat-exemption-in-uae

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