VAT vs Corporate Tax in UAE: Key Differences Every Business Should Know
As the UAE aligns with global tax systems, two primary taxes—Value Added Tax (VAT) and Corporate Tax (CT)—now apply to businesses. Both serve different purposes, affect different financial aspects, and require separate compliance. Understanding these differences is essential for SMEs, startups, Free Zone companies, and consultants operating in the region.
What is VAT in the UAE?
VAT is a 5% indirect tax applied on the consumption of goods and services. It’s collected by businesses from customers and remitted to the Federal Tax Authority (FTA).
Mandatory VAT registration is required if taxable turnover exceeds AED 375,000. Voluntary registration is allowed if turnover is between AED 187,500 and AED 375,000.
Registered companies must file quarterly VAT returns, maintain proper invoices, and track input VAT paid to suppliers to deduct from the VAT they collect.
More details can be found on the UAE Federal Tax Authority VAT page.
What is Corporate Tax in the UAE?
Corporate Tax is a direct tax on net profits. Introduced in June 2023, it applies at:
0% on earnings up to AED 375,000
9% on profits above AED 375,000
The tax targets UAE-based businesses, not individuals earning income from salary or personal investments. Companies must file annual corporate tax returns within 9 months after their financial year ends and prepare audited financial statements.
More details are available from the Ministry of Finance Corporate Tax page.
Key Differences Between VAT and Corporate Tax
VAT and CT differ significantly in their purpose and mechanism:
VAT is a transaction-based, indirect tax applied on sales and services.
Corporate Tax is a direct tax applied to a company’s net profits.
VAT applies when annual turnover exceeds AED 375,000, while CT applies when net profit exceeds the same threshold.
VAT returns are filed quarterly, while corporate tax returns are annual.
To understand UAE filing procedures, visit our Corporate Tax Filing Guide for SMEs.
Do Free Zone Companies Need to Pay These Taxes?
VAT for Free Zones
Yes. Free Zone companies must register for VAT if their taxable turnover exceeds AED 375,000, just like mainland businesses. Filing and payment obligations remain the same.
Corporate Tax for Free Zones
Free Zone companies may qualify for 0% corporate tax if they:
Operate solely within the Free Zone or other Free Zones
Do not generate income from mainland UAE
Maintain audited accounts and meet the conditions of a Qualifying Free Zone Person
Failure to meet these criteria leads to the application of 9% CT.
For more guidance, read How to Register a Company in a UAE Free Zone.
Real-Life Example
Let’s say you operate a company in IFZA (International Free Zone Authority), with AED 600,000 in revenue and AED 200,000 in profit.
You must register for VAT because the turnover exceeds AED 375,000.
You don’t have to pay Corporate Tax as your net profit is below the taxable threshold, but you still need to register and file a return.
For related information, check IFZA Company Setup Cost – 2024.
What Are the Compliance Requirements?
VAT
Maintain accurate invoices and VAT records
File VAT returns every quarter
Failure to comply may lead to penalties from AED 1,000 to AED 50,000
Corporate Tax
Prepare audited financial statements
File CT returns annually within 9 months after the financial year ends
Late or incorrect filing may result in fines, audit, or legal action
To stay compliant, many SMEs now outsource finance and tax functions. Learn more from our article on Outsourcing Bookkeeping in the UAE.
Frequently Asked Questions
Can a business be exempt from both VAT and CT?
Yes, if both annual turnover and net profit are below AED 375,000. However, voluntary VAT registration can be useful for claiming input VAT.
Do all Free Zone companies get 0% Corporate Tax?
No. Only companies that meet FTA’s qualifying criteria and don’t trade with the mainland can benefit from 0% CT. Otherwise, 9% applies.
Are freelancers or influencers subject to CT?
Yes, if they have a trade license and profits exceed AED 375,000. If not operating under a license, personal income remains exempt.
What are the penalties for late filing?
For VAT, AED 1,000 for the first late return, AED 2,000 for repeat violations.
For CT, penalties vary and can escalate based on delay or omission.
Is foreign income taxed in the UAE?
No. Only UAE-sourced profits are taxed. However, check if your country has a Double Taxation Agreement with the UAE. A full list is available on the UAE Tax Treaties page.
Final Thoughts
Understanding VAT and Corporate Tax is no longer optional. These tax regimes directly affect your business operations, from structuring pricing to filing obligations. VAT ensures accountability on every sale, while Corporate Tax emphasizes financial transparency and global alignment.
Whether you’re operating in mainland UAE or a Free Zone, compliance is key. At RAS Corporate Advisors, we simplify tax compliance for you—handling everything from VAT registration, CT filing, to Free Zone structuringand bookkeeping.
Need help with VAT or Corporate Tax compliance? Contact us for a free consultation and protect your business from penalties and non-compliance.
