The Difference between VAT and Corporate Tax in the UAE

− An Overview! −

In the UAE, Value Added Tax (VAT) and Corporate Tax are two distinct forms of taxation, each with its own scope, purpose, and application. Below is a synopsis of the key differences between them:

A. Overview

• Value Added Tax: VAT is an indirect tax applied to goods and services at each stage of the supply chain, from production to the final sale. It is paid by consumers, but businesses are responsible for collecting and remitting the tax to the government.
• Corporate Tax: Corporate tax is a direct tax imposed on the profits of companies operating in the UAE. The rate is applied to the net income of businesses and must be paid by the companies themselves.

B. Purpose

• VAT: VAT is intended to generate revenue for the government by taxing the consumption of goods and services. It is designed to be a broad-based tax that applies to most economic activities, with certain exemptions and zero-rated items.
• Corporate Tax: Corporate tax aims to generate revenue from businesses’ profits. It is a key measure of a country’s tax system applied to the net income of corporate entities, focusing on business profitability.

C. Taxpayer

• VAT: The end consumer ultimately bears the cost of VAT, but businesses are responsible for collecting, reporting, and remitting the tax. VAT is therefore paid by businesses on behalf of consumers.
• Corporate Tax: The businesses are the taxpayers, and they are responsible for calculating and paying corporate tax on their profits. Corporate tax applies to companies, partnerships, and other corporate entities that meet the criteria.

D. Tax Rate

• VAT: The standard VAT rate in the UAE is 5% on most goods and services. Certain goods and services are exempt from VAT, while others are zero-rated, meaning VAT is applied at 0%.
• Corporate Tax: The UAE introduced a Corporate Tax on business profits starting June 1, 2023:
  • • 9% tax rate for annual taxable profits exceeding AED 375,000.
    • 0% tax rate for taxable profits up to AED 375,000, aimed at supporting small businesses and startups.
    • Corporate tax rate for certain business activities may vary, with specific rules for natural resource extraction, multinational groups, and free zone businesses (depending on their activities).

   

E. Scope of Application

• VAT: VAT applies to all businesses engaged in the supply of goods and services in the UAE unless specifically exempted or zero-rated. It applies across most sectors, including retail, hospitality, construction, education, and healthcare (with some exceptions for specific sectors).
• Corporate Tax: Corporate tax applies to the profits of businesses operating in the UAE. The tax is generally applied to most businesses, including those in non-oil and gas sectors. However, certain businesses in UAE free zones can benefit from exemptions or preferential tax rates, provided they meet specific conditions.

F. Filing and Reporting:

• VAT: VAT-registered businesses must file periodic VAT returns, typically on a quarterly or monthly basis, depending on the business size. These returns report the VAT collected on sales and the VAT paid on purchases. The difference must be remitted to the government.

• Corporate Tax: Corporate tax is typically filed annually, with businesses required to submit a corporate tax return at the end of their financial year. Businesses must calculate their taxable profits, adjust for allowable deductions and exemptions, and pay any owed corporate tax.

G. Deductions and Exemptions:

• VAT: VAT allows businesses to deduct input VAT (the VAT paid on business-related purchases) from output VAT (the VAT collected on sales). This helps to avoid the cascading effect of tax on tax and ensures that the tax is only levied on the value added at each stage of production or distribution.

• Corporate Tax: Corporate tax allows for various deductions based on allowable business expenses, such as operating costs, depreciation, and interest on loans. Certain businesses may also qualify for exemptions or preferential treatment based on their activities (e.g., research and development, exports, or specific zones).

H. Penalties for Non-Compliance

• VAT: Failure to comply with VAT regulations (e.g., late registration, late payment, incorrect filings) can lead to penalties, including:

• • Fines for late filing or payment.
  • Penalties for issuing false tax invoices.
  • Fines for failure to keep proper records.
• Corporate Tax: Non-compliance with corporate tax regulations can result in penalties such as:

• • Late filing or late payment fines.
  • Interest on overdue tax amounts.
  • Penalties for incorrect reporting or failure to submit returns.

I. Refunds

• VAT: Businesses can claim VAT refunds on business-related purchases if they have a VAT credit (i.e., when the VAT paid on purchases exceeds VAT collected on sales). Businesses can request refunds through the FTA portal.

• Corporate Tax: Corporate tax refunds are typically available when a business has overpaid its tax liability or if it is eligible for a tax credit under specific conditions (such as foreign tax credits or overpayment of tax).

J. Impact on Different Business Types

• VAT: VAT applies to almost all types of businesses, except for those in specific exempt sectors (e.g., certain healthcare and education services). However, it only affects consumer transactions.

• Corporate Tax: Corporate tax impacts businesses’ net profits and is relevant for corporations and companies with a taxable profit above the set threshold.

K. Summary Table

Aspect	VAT (Value Added Tax)	Corporate Tax
Type of Tax	Indirect tax (consumption-based)	Direct tax (profits-based)
Taxpayer	Businesses collect VAT from consumers	Businesses pay corporate tax on their profits
Tax Rate	5% standard rate (with exemptions and zero-rated items)	9% on profits over AED 375,000, 0% on profits up to AED 375,000
Scope	Applies to goods and services	Applies to business profits
Filling Frequency	Quarterly or monthly returns	Annual return, based on financial year
Deductions	Businesses can deduct input VAT from output VAT	Businesses can deduct operating costs, depreciation, etc.
Exemptions	Certain goods and services exempt from VAT	Specific businesses may qualify for exemptions or preferential rates
Penalties	Fines for late filing/payment, incorrect returns	Fines for late filing/payment, incorrect tax returns
Refunds	VAT refunds on business-related purchases	Refunds for overpaid taxes or eligible tax credits

L. Conclusion:

While both VAT and corporate tax generate revenue for the UAE government, they are distinct in their application, calculation, and scope. VAT is a consumption tax collected by businesses from consumers, while corporate tax is levied on the profits of businesses.

Both taxes have different filing requirements, exemptions, and penalties, but together, they contribute to the country’s non-oil revenue stream. Businesses in the UAE need to be aware of both tax systems and the two registration procedures and comply with their respective obligations to avoid penalties.