Understanding taxes is crucial for businesses in the UAE. Two key types of taxes you need to know about are Value-Added Tax (VAT) and Corporate Tax. This guide will explain what they are, how they work, and what your business needs to do to comply.
What is Value-Added Tax (VAT)?
Value-Added Tax (VAT) is a tax added to goods and services at each stage of production and sale. The final consumer pays this tax, but businesses collect it on behalf of the government.
Example:
A manufacturer sells a product to a retailer for AED 100 + 5% VAT (AED 5). The retailer then sells it to a consumer for AED 150 + 5% VAT (AED 7.50). The retailer remits AED 2.50 to the government (AED 7.50 collected minus AED 5 paid to the manufacturer).
Implementation of VAT in the UAE
VAT started in the UAE on January 1, 2018, to help diversify revenue sources away from oil
Key Features of VAT
Feature Details
Rate 5%
Scope Applies to most goods and services, with some exemptions
Collection Businesses collect VAT and remit it to the Federal Tax Authority (FTA)
Types of VAT Registration for Businesses
Registration Type Threshold
Mandatory Annual taxable supplies and imports > AED 375,000
Voluntary Annual taxable supplies and imports between AED 187,500 and AED 375,000
What is Corporate Tax?
Definition of Corporate Tax
● Corporate Tax is a tax on a company's profits after deducting allowable expenses.
Example:
● A company with a profit of AED 500,000 would pay 9% on AED 125,000 (profit over AED 375,000), which equals AED 11,250.
Implementation in the UAE
● Corporate Tax was introduced on June 1, 2023, aligning the UAE with global tax practices.
Key Features of Corporate Tax
Feature Details
Rate 9% on taxable income above AED 375,000
Scope Applies to UAE-based businesses and foreign businesses operating in the UAE
Payment Deadlines Annual tax return filed within nine months after the financial year ends
Key Differences Between VAT and Corporate Tax
Aspect VAT Corporate Tax
Nature of Consumption-based tax on Profit-based tax on business income
the Tax goods and services
Who is Affected Businesses collect it, Only businesses are affected
consumers pay it
Calculation Calculated on each Calculated annually
transaction based on net profits
Payment Regular payments (typically Annual payment
quarterly)
Compliance Requirements
VAT Compliance
● Filing VAT Returns: Quarterly submissions detailing VAT collected and paid.
● Record-Keeping: Maintain transaction records (invoices, receipts) for at least five years.
Corporate Tax Compliance
● Annual Tax Return Filing: Submit a yearly return showing taxable income and the tax owed.
● Financial Record Maintenance: Keep comprehensive records to support the tax return.
Conclusion
Understanding and complying with VAT and Corporate Tax is essential for UAE businesses. By staying informed and adhering to tax regulations, you can avoid penalties and ensure smooth operations.
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