In recent years, the UAE has strengthened its tax system to diversify government revenue and align with international tax standards. With the introduction of VAT in January 2018 at a rate of 5% and the subsequent roll-out of Corporate Tax in June 2023 at a rate of 9%, the UAE’s tax environment is evolving rapidly. For businesses in the UAE, grasping the key differences and interactions between VAT and Corporate Tax is crucial for effective financial management and compliance.
VAT vs. Corporate Tax: What Sets Them Apart?
The UAE’s tax system introduces two key taxes—Value Added Tax (VAT) and Corporate Tax (CT)—that function differently but are both essential for businesses to understand.
VAT is a consumption tax that is applied to goods and services at each point in the supply chain. While it ultimately falls on the end consumer, businesses are responsible for collecting VAT on sales (output VAT) and reclaiming VAT on purchases (input VAT). The difference between the two is remitted to the Federal Tax Authority (FTA).
Corporate Tax, on the other hand, is a direct tax applied to business profits. It is calculated based on a company’s financial performance—income minus allowable expenses—and is paid directly by businesses themselves.
Key Differences in Practice:
- VAT:
- An indirect tax collected by businesses.
- Affects the final price paid by consumers.
- Reclaimable for businesses on purchases/refund from the authority in some cases.
- Corporate Tax:
- A direct tax on business profits.
- Impacts company earnings after expenses are deducted.
- Cannot be reclaimed.
- Only applies the net profit generated above 375,000 AED/Fiscal year
- There’s a relief program and some exemptions depend on some criteria
Who Needs to Register for VAT and Corporate Tax?
Understanding the registration thresholds for VAT and Corporate Tax is essential to ensure compliance.
VAT Registration Criteria
- Mandatory Registration: Required if a business’s taxable supplies and imports exceed AED 375,000 within any 12-rolling months cycle.
- Voluntary Registration: Available if taxable supplies and imports exceed AED 187,500 on 12-rolling months bases, and unavailable for businesses generating below the 187,500 AED within the period.
Corporate Tax Registration Criteria
- For Limited Liability Companies: All companies incorporated in the UAE must register for Corporate Tax.
- For Sole Establishments: Sole Establishments conducting business activities with an annual turnover above AED 1 million must also register for Corporate Tax.
How VAT and Corporate Tax Impact Businesses in the UAE
Although both taxes affect a company’s finances, they influence operations in different ways.
Adjusting Business Pricing Strategies
- VAT: This tax is typically included in the final price paid by consumers, meaning it directly impacts how much customers are willing to pay for goods and services.
- Corporate Tax: While not directly added to the price of products or services, Understanding Corporate Tax allows businesses to plan strategically, helping them protect profitability and maintain healthy margins without compromising on pricing.
Business Expenditure Considerations
- VAT: Businesses incur VAT on their purchases but can reclaim this.
- Corporate Tax: Many business-related expenses are deductible which reduces the company’s taxable profit and lowers Corporate Tax obligations.
The Importance of Keeping Accurate Financial Records
Accurate book-keeping is essential for businesses to meet the compliance requirements. Maintaining up-to-date financial documents helps businesses avoid fines and ensures a smooth tax filing process. Businesses must retain records for at least 7 years following the end of the relevant tax period.
Essential Documents to Retain
- Income and balance sheets
- Invoices and receipts
- Payroll records
- P&L Statements
- Inventory lists
- Any documents required by UAE tax laws
Summing It Up
The introduction of VAT and Corporate Tax represents a significant shift in the UAE’s economic landscape, and understanding how each tax operates is vital for businesses to stay compliant and optimize their tax positions. Whether it’s VAT influencing pricing strategies or Corporate Tax affecting net profit, being well-versed in these taxes can help businesses plan more effectively and avoid penalties.
How SetHub Can Help Your Business Navigate VAT and Corporate Tax
Navigating the complexities of VAT and Corporate Tax requires expertise and a clear understanding of the ever-evolving tax environment. At SetHub, we specialize in helping businesses stay compliant with UAE tax laws. Our services include:
- VAT and Corporate Tax registration assistance
- Ongoing tax advisory and planning
- Record-keeping support
- Guidance on international tax implications
- Audit
- Anti-money laundering (AML) & other compliance obligations
Get in touch with us today to ensure your business thrives in the UAE’s tax environment!
