How Is Corporate Tax Different from VAT?

Entrepreneurs starting or running a business in the UAE have likely encountered two main taxes: Corporate Tax and Value Added Tax (VAT). Let’s look at what each tax involves and how they differ.

Understanding Corporate Tax

Corporate Tax is a tax on a company’s profit. It applies to the money businesses make after covering all expenses, so think of it as a tax on the leftover profit. Introduced in the UAE in June 2023, Corporate Tax is charged at 0% on profits up to AED 375,000 and 9% on profits above that, with some free zone businesses enjoying special rates if they meet certain conditions. Companies calculate and pay Corporate Tax once a year, similar to doing an annual financial checkup and paying a tax based on their overall business health.

Understanding VAT

VAT, or Value Added Tax, is a tax on spending. Introduced in the UAE in January 2018, it adds 5% to the price of most goods and services. Businesses collect VAT from customers when they sell products or services and also pay VAT on their own purchases. Every three months, businesses report the VAT collected and paid, settling the balance with the government. Unlike Corporate Tax, which businesses pay directly on their profits, VAT is passed to customers but handled by businesses.