Difference Between Corporate Tax and VAT in the UAE

Difference Between Corporate Tax and VAT in the UAE

At ALWAHAT Accounts and Internal Audit Services, we often hear this question from our clients:
“What is the difference between VAT and Corporate Tax in the UAE?”

With both taxes now applicable to businesses across the country, it's important to understand how they differ and how each one affects your operations.

What is VAT?

Value Added Tax (VAT) is an indirect tax that was introduced in the UAE on 1 January 2018. It is applied to most goods and services at a standard rate of 5%, and the end consumer bears the cost. Businesses act as tax collectors, adding VAT to their sales and submitting it to the Federal Tax Authority (FTA).

VAT is applicable to businesses that exceed the mandatory threshold of AED 375,000 in annual taxable supplies. Registration, timely filing, and accurate VAT return submissions are critical to staying compliant.

What is Corporate Tax?

Corporate Tax, on the other hand, is a direct tax levied on the net profits of companies. Introduced in the UAE for financial years starting on or after 1 June 2023, it is part of the country's commitment to global tax transparency.

A 9% Corporate Tax applies to annual profits that exceed AED 375,000. Profits below this amount are taxed at 0%. The tax is paid by the company itself, not by its customers.

Key Differences Between VAT and Corporate Tax

While both taxes are overseen by the FTA and involve business compliance, they differ in nature and function:

• VAT is based on sales of goods and services and is collected from customers. Businesses act as intermediaries and file VAT returns quarterly (or as assigned by the FTA).

• Corporate Tax is calculated on the business’s net income or profit. It is paid directly by the company and requires annual filing along with proper financial statements.

• VAT affects your pricing structure and invoicing, while Corporate Tax affects your profit margins and financial planning.

• Some free zone companies may still be eligible for 0% Corporate Tax, subject to certain conditions, while VAT generally applies regardless of zone status.

Why This Matters for Your Business

Understanding the distinction between VAT and Corporate Tax helps your business:

• Avoid penalties for non-compliance

• Plan financially for both short-term and annual obligations

• Stay compliant with UAE's evolving tax environment

• Take advantage of exemptions or zero-ratings where applicable

How ALWAHAT Can Support You

At ALWAHAT Accounts and Internal Audit Services, we offer comprehensive support for both VAT and Corporate Tax, including:

• Registration and deregistration assistance

• Accurate tax return filing

• FTA audit preparation

• Bookkeeping and financial reporting

• Custom tax strategies for free zone and mainland businesses

Our team is committed to guiding you through every step of your compliance journey.

Disclaimer

This blog is for informational purposes only and should not be considered professional tax or legal advice. For accurate, up-to-date guidance, please refer to the official publications and regulations issued by the Federal Tax Authority (FTA). Always consult a tax agent or advisor for business-specific recommendations.