VAT vs Corporate Tax in the UAE
Many business owners are getting confused between the implication of Corporate Tax and Value Added Tax (VAT), especially in the case of registration with the Federal Tax Authority. Even though both the taxes are handled by the same authority (Lawmaker Ministry of Finance, UAE, and the law implemented by Federal Tax Authority), there are many differences between Value Added Tax and Corporate Tax in the UAE. This article, let us understand the differences between both the taxes and the regulatory requirements under both Corporate Tax and Value Added Tax.
1. Type of tax
Value Added Tax is an indirect tax, which means the tax liability is not on the seller, the final tax liability is on the consumer.
Corporate Tax is a direct tax, and it is to be paid from the profit of the business.
2. Effective date
Value Added Tax is implemented in the UAE, effective 01 January 2018.
Corporate Tax is implemented in the UAE, effective 1 June 2023.
3. Applicability
Value Added Tax is applicable on goods and services sold in UAE, exported from UAE, imported to UAE, etc.
Corporate Tax is applicable for all businesses in the UAE, even for holding companies.
4. Registration
Under Value Added Tax, there are thresholds for registrations like voluntary registration threshold, mandatory registration threshold, etc.
Under Corporate Tax, there is no such threshold. Irrespective of profit, loss, no business etc., the companies must register for Corporate Tax
5. Deadline for Registration
Value Added Tax registration application has to be submitted within 30 days once the mandatory registration threshold is exceeded.
Corporate Tax registration application has to be submitted within 3 months from the date of license issuance (applicable for companies’ licenses issued on or after 01 March 2024)
6. Filings
Value Added Tax filings are generally on a quarterly basis. Once the quarter is over, the authority gives 28 days to file the VAT returns and make the VAT payment, if applicable.
Corporate Tax filings are generally on an annual basis. Once the tax year is finished, the taxable person has to submit the Corporate Tax return within 9 months and pay tax, if applicable.
7. Tax Rates
Value Added Tax rates are as below;
- 5%, which is otherwise called standard-rated supplies.
- 0%, which is otherwise called zero-rated supplies.
- Certain supplies are exempted from VAT, and certain are outside the scope of VAT.
Corporate Tax rates are as below;
- 0% for the taxable income up to AED 375,000/-
- 9% for the taxable income over and above AED 375,000/-
- Free Zone companies are eligible for 0% Corporate Tax on their Qualifying income, subject to conditions.
- Multinational Entities who are having more than 3.15 billion worldwide revenue are taxed at 15% (BEPS Pillar 2)
- Certain incomes are exempt, and certain reliefs are available under UAE Corporate Tax
8. Document keeping
Under Value Added Tax, all the documents relating to VAT shall be kept for a minimum of 5 years. If the documents are related to real estate assets, such documents shall be kept for 15 years
Under Corporate Tax, the documents shall be kept for the current year and 7 subsequent years.
9. Accounting Standard Requirements and financial year
Value Added Tax is based on the invoices and bills, not on the income booked in the books of accounts. There is no financial year concept in Value Added Tax. The Value Added Tax is on a quarterly basis from the month of approval.
Corporate Tax computation starts from the accounting profit before tax, which is prepared as per International Financial Reporting Standards (IFRS). Corporate Tax is calculated based on the financial year of the company.
10. De-registration
Value Added Tax registration shall be de-registered under the below circumstances;
- When the turnover/import/taxable in the previous 12 months is below the voluntary threshold of registration and not expected to exceed in the coming 30 days.
- When the taxable person ceases the business. Example: - Liquidation of the company.
Corporate Tax registration shall be de-registered when;
- The business or business activity ceases, like liquidation of license.
Keep in mind that both registrations are separate. Even if a company has the Value Added Tax registration number, that does not mean they are not required to register for Corporate Tax. VAT registration number cannot use for Corporate Tax purposes.
To learn more about Differences between Corporate Tax and Value Added Tax in UAE, book a free consultation with one of the Flyingcolour team advisors.
Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.