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Difference between VAT and corporate tax in UAE

26 May 2023

By Admin

Difference between VAT and corporate tax in UAE

26 May 2023


The United Arab Emirates (UAE) has one of the most dynamic and diverse economies in the world, attracting investors from all over the globe. However, with its complex tax system, it can be quite challenging for new businesses to navigate their way through it. Two essential taxes in UAE that companies need to understand are VAT and corporate tax. Although both may seem similar, they have distinct differences that every business owner should know about. In this blog post, we'll delve into what each tax is, how they differ from one another, and what rates apply in UAE. So sit tight as we break down everything you need to know about VAT vs. corporate Tax!

What is VAT?

The Value-Added Tax (VAT) is a sales tax levied on most purchased services and goods. It is sometimes referred to as an indirect tax because it is borne by the general public rather than by corporations. The value-added tax is paid on everything, from raw materials to completed goods, at every stage of manufacturing and distribution.

The United Arab Emirates implemented a 5% VAT in 2018. Healthcare and education are two examples of VAT-free categories, while luxury goods have significantly higher rates. VAT is a sales tax that registered businesses must collect from their customers but can recoup by charging customers the same amount on their purchases.

Businesses in the United Arab Emirates (UAE) must be familiar with value-added tax (VAT) in order to avoid severe penalties, including possible legal action. Therefore, it is essential when dealing with VAT to keep precise records of transactions and know which products and services are subject to taxation.

What is corporate tax?

Corporate tax is a type of direct tax levied on businesses' profits and calculated using their income from sales or services rendered, among other sources. Prior to now, no such corporate taxes existed within the UAE, but this will soon change, as on December 9, 2022, the Federal Tax Authority released its Corporate Tax Decree Law.

The introduction of such a tax is intended to transform the UAE economy from being fuel-dependent into one with diverse revenue sources by investing massive amounts in technology and innovation and levying a Corporate tax in UAE. With such a system in place, state revenues may become less dependent upon oil revenues - increasing state revenues instead. For the new corporate tax regime, proposed rates include as follows.

Income up to AED 3,750,000 is exempt from taxation. 
Income over AED 3,75,000 is subject to a 9% tax rate. 
The OECD Base Erosion and Profit-Sharing Rules will be applied by the relevant authorities to MNEs that fall within Pillar 2 of the BEPS 2.0 framework. 

Difference between VAT and corporate tax


VAT and corporate tax are two types of taxes that companies in the UAE are required to pay. While both these taxes contribute to the government's revenue, there is a significant difference between them.

Value Added Tax (VAT) is a consumption tax levied on goods and services at each stage of production and distribution. It is paid by consumers when they purchase goods or services and collected by businesses on behalf of the government. VAT helps generate revenue for the government while also ensuring transparency in transactions.

Profits made by corporations throughout a fiscal year are subject to a separate tax known as "corporate tax." Therefore, businesses must hand over to the government a portion of their profits as tax. Corporate taxes are levied primarily to finance social programs, including healthcare, education, infrastructure, and others.

In contrast to corporation tax, which is directly tied to a company's profits, the value-added tax is based on consumers' purchases but not on the companies themselves. In addition, the rate of value-added tax varies with the category of product, whereas the rate of corporate tax varies with the size and profitability of the business.

Understanding how different taxes work can help businesses manage their finances better while also contributing towards national development goals.

Conclusion


Businesses in the UAE are subject to both value-added tax and corporate tax. Corporate tax is a direct tax on business income, as opposed to VAT which is a consumption-based tax on products and services. The tax bases, rates, and reporting requirements for these two categories are all different.

In order to operate within the bounds of the law, businesses must have a firm grasp of the distinctions between value-added tax and corporate tax. Penalties or fines for not doing so can be costly for any business. So hiring a tax consultant in UAE is a good option.

Whether you're starting a new venture or already running an established business, it's critical to have a clear understanding of your obligations towards VAT vs. corporate tax in UAE. By doing so, you'll be able to make informed decisions about managing your finances effectively while ensuring legal compliance at all times.
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