Difference Between VAT and Corporate Tax in UAE

VAT (Value Added Tax) and Corporate Tax are both taxes businesses in the United Arab Emirates must understand—but they apply in very different ways. At a glance:

• VAT is an indirect tax on consumption, charged at the point of sale and usually passed on to the end consumer.
  

• Corporate Tax is a direct tax on profit, paid by businesses based on their taxable income, not on transactions or sales volume.
  

Understanding these basic differences helps you see how each affects your business differently on pricing, reporting, and cash flow.

VAT Explained Simply

VAT is a 5 percent tax applied to most goods and services sold or imported in the UAE. It was introduced on 1 January 2018 to diversify government revenue beyond oil.

How VAT Is Collected and Paid

• Businesses collect VAT from customers at the point of sale (this is called output tax).
  

• They offset VAT they’ve paid on expenses (known as input tax), then remit the difference to the Federal Tax Authority (FTA).
  

In other words, you don’t pay VAT out of your profit—it’s passed along to consumers, which you collect and then pass to the government.

Who Must Register for VAT?

• Mandatory registration: Businesses whose taxable supplies and imports exceed AED 375,000 annually.
  

• Voluntary registration: Available when taxable supplies exceed AED 187,500 annually.
  

Filing and Compliance

VAT returns are usually filed quarterly (or monthly for high-turnover businesses), and must be submitted within 28 days from the end of the tax period.

Corporate Tax Defined

Corporate Tax is a direct tax on business profits, first applied in the UAE on financial years starting 1 June 2023. It’s not charged on sales or turnover—it’s based on net profit after allowable expenses. 

Current Corporate Tax Rates (2025)

• 0% on profits up to AED 375,000
  

• 9% on taxable profits above AED 375,000
  

This tiered approach supports smaller businesses while ensuring larger profitable companies contribute to public revenue.

Who Pays Corporate Tax?

Corporate Tax applies broadly to:

• Mainland businesses operating in the UAE
  

• Some free zone entities (subject to qualifying criteria)
  

• Foreign companies with a permanent establishment in the UAE
  

Some entities—such as pension funds, public benefit organizations, or specific investment entities—may have different treatment or exemptions.

Filing and Reporting

Corporate Tax returns are filed annually, typically within nine months of the end of the financial year. Financial statements and audited accounts are usually part of the compliance process.

Does VAT Affect Profit?

Not directly. VAT is a consumption tax: you collect it on sales and pass it to the FTA. Your profit isn’t taxed with VAT—for example, a restaurant charging 5 percent VAT doesn’t pay that 5 percent out of profit.

Does Corporate Tax Affect Profit?

Yes, significantly. Corporate Tax is applied to net profit, so the more profitable your business, the more tax you will owe above the AED 375,000 threshold.

In simple terms:

• VAT impacts pricing and cash flow because you collect tax regularly on sales.
  

• Corporate Tax impacts profit allocation and strategic financial planning because it’s charged once profit is calculated.

Indirect (VAT)

• Consumers pay it as part of the final price.
  

• Businesses act as intermediaries to collect and remit it.
  

Direct (Corporate Tax)

• Businesses pay it on profit.
  

Yes. Most UAE companies that meet the respective thresholds will need to handle both VAT and Corporate Tax.

• VAT: If your taxable sales hit AED 375,000+ per year.
  

• Corporate Tax: If your net profit exceeds AED 375,000 per year.
  

VAT shapes how you price goods and services because it affects what your customer actually pays.

Corporate Tax shapes your profitability strategy because it influences how much profit you retain and reinvest.

Both must be integrated into your financial planning, bookkeeping, and pricing models to avoid surprises at filing time.

1. What is the VAT rate in the UAE and does it change?VAT in the UAE is charged at a standard rate of 5 percent on most goods and services. Some items, like exports, international transport, and certain healthcare and education services, are zero-rated or exempt. Updates effective January 1, 2026, will clarify deadlines for refunds and credits.

2. Who must register for VAT in the UAE?
Businesses with annual taxable supplies above AED 375,000 must register for VAT. Businesses with turnover between AED 187,500 and AED 375,000 can voluntarily register.

3. What happens if VAT registration or filing is delayed?
Late registration or filing can trigger penalties starting from a few thousand dirhams, escalating with repeated non-compliance. Maintaining accurate records and filing on time is essential.

4. What is the Corporate Tax rate in the UAE?

• 0% on profits up to AED 375,000
  

• 9% on profits above AED 375,000
  

• Some large multinationals may pay 15% under OECD Pillar Two rules where applicable.
  

5. Who must register for Corporate Tax?
All UAE businesses — mainland or free zone — must register for Corporate Tax, even if profit is zero. Certain free zone entities may qualify for 0% tax on qualifying income if they meet specific conditions.

6. Do I need to file Corporate Tax if my profit is zero?
Yes. A nil return certifies that no tax is payable and ensures compliance, avoiding penalties.

7. How often are VAT and Corporate Tax returns filed?

• VAT: quarterly (or monthly for large businesses)
  

• Corporate Tax: annually, usually within nine months after the end of the financial year.
  

8. Can a business pay both VAT and Corporate Tax?
Yes. Most businesses pay both taxes if they meet the respective thresholds. VAT and Corporate Tax are separate systems with distinct reporting and compliance requirements.

9. Do corporations pay VAT on profits?
No. VAT applies to goods and services, not profits. Corporate Tax is levied on net profits after allowable expenses.

10. Are there penalties for failing to comply with VAT or Corporate Tax?
Yes. Penalties include fines for late or missing returns, inaccurate filings, and failure to maintain proper records. Fines depend on the type and severity of the violation.

Understanding the difference between VAT and Corporate Tax is essential for staying compliant in the UAE, but applying these rules correctly in day-to-day operations can be challenging. 

Many businesses choose to work with professionals to ensure their tax records, filings, and financial processes align with current regulations.