Understanding VAT and Corporate Tax in the UAE: Key Differences Explained

18 Aug 2025

By Vista Corp

The UAE has long been recognised as one of the most attractive destinations for businesses and entrepreneurs worldwide. With its tax-friendly environment, strong economy, and global connectivity, it provides fertile ground for both startups and multinationals.

But with the introduction of Corporate Tax in June 2023 and the existing Value-Added Tax (VAT) regime that started in 2018, business owners now need to understand how these two taxes work, and, importantly, how they differ.

This guide will take you step by step through what VAT and Corporate Tax are, how they apply in the UAE, their key differences, and what every business owner should know to stay compliant.

What is VAT in the UAE?

VAT, or Value-Added Tax, is an indirect tax on consumption. It is applied at each stage of the supply chain, from manufacturers and wholesalers to retailers, but the final consumer bears the cost.

Standard VAT Rate: 5% on most goods and services.
Collected by businesses: Companies act as tax collectors for the Federal Tax Authority (FTA). They add VAT to invoices, collect it from customers, and remit it to the government.
Business Impact: While VAT does not directly affect profits, it does impact cash flow since businesses must manage VAT collected versus VAT paid (input and output tax).

VAT Exemptions and Zero-Rated Supplies

Not everything is taxed equally. Some supplies are exempt, while others are zero-rated (0% VAT). Examples:

Zero-rated: Export of goods and services, certain educational services, healthcare, and international transportation.
Exempt: Residential real estate, bare land, certain financial services.

VAT Registration

Mandatory: Annual turnover above AED 375,000.
Voluntary: Turnover above AED 187,500.

What is Corporate Tax in the UAE?

Corporate Tax is a direct tax on business profits. Unlike VAT, which is tied to consumer spending, Corporate Tax applies to a company’s net income after expenses.

Introduced in June 2023, the UAE Corporate Tax is designed to align the country with global tax standards and diversify government revenue streams.

Corporate Tax Rates in the UAE

0% on taxable income up to AED 375,000.
9% on profits above AED 375,000.
15% top-up tax (from Jan 2025) for large multinational groups earning over EUR 750 million annually (in line with the OECD’s Pillar Two global tax reforms).

Who Must Pay Corporate Tax?

UAE-incorporated companies.
Foreign companies with a permanent establishment in the UAE.
Free Zone companies (though many enjoy Corporate Tax exemptions in the UAE if they comply with qualifying activity rules).

Example: How VAT and Corporate Tax Work Together in the UAE

Let’s imagine ABC Consulting Ltd, a business operating in Dubai.

Step 1: Annual Revenue and VAT

ABC Consulting earns AED 1,000,000 in revenue from clients in Dubai.
VAT (5%) is charged on invoices = AED 50,000.
This VAT is collected from clients, not paid from profits.
ABC Consulting also pays VAT on office rent, supplies, and services (say AED 10,000 input VAT).
Net VAT payable to the FTA = AED 40,000 (50,000 – 10,000).

This shows how VAT flows through the business but is ultimately paid by the end consumer.

Step 2: Expenses and Profit (Corporate Tax)

Business expenses (salaries, rent, utilities, marketing, etc.) = AED 600,000.
Net profit before tax = AED 400,000.

Corporate Tax applies:

First AED 375,000 profit = 0% tax.
Remaining AED 25,000 profit = taxed at 9% = AED 2,250 Corporate Tax.

Unlike VAT, Corporate Tax directly reduces business profits.

Step 3: Final Impact

VAT collected = AED 40,000 (paid to FTA).
Corporate Tax = AED 2,250 (paid to FTA).
Final retained profit after all taxes = AED 397,750.

Key Takeaway for Readers

VAT is about how you sell (collected from customers and remitted).
Corporate Tax is about how you profit (calculated on net income and paid by the business).
Together, they shape both pricing strategy and profitability.

VAT vs Corporate Tax: A Dive into the Differences

The table below will help you understand the difference between VAT and Corporate Tax in the UAE.

Aspect	VAT	Corporate Tax
Type of Tax	Indirect tax on consumption	Direct tax on profits
Introduced in the UAE	2018	2023
Who Pays?	Ultimately, the end consumer	The company itself
Rate	Standard 5%	0% (≤ AED 375k), 9% (> AED 375k), 15% for MNEs
Collected By	Businesses collect from customers and remit to FTA	Companies calculate and pay annually
Impact on Cash Flow	Businesses manage VAT collected vs VAT paid	Impacts profitability and retained earnings
Exemptions	Healthcare, education, residential real estate, and exports	Qualifying free zone entities, certain government entities
Filing Frequency	Quarterly or monthly	Annually
Primary Goal	Generate government revenue without taxing income	Align the UAE with global tax systems, boost federal revenue
Compliance Authority	Federal Tax Authority (FTA)	Federal Tax Authority (FTA)

Why Both Taxes Matter for Businesses

Understanding both VAT and Corporate Tax is crucial because:

VAT affects your pricing and invoicing: Businesses must charge VAT correctly to avoid penalties.
Corporate Tax affects profitability: It changes how much income you can retain or reinvest.
Dual compliance is mandatory: Even if your business has minimal profits (exempt from Corporate Tax), you may still be liable for VAT.

Key Challenges Businesses Face

Double Compliance – Companies must stay compliant with both VAT and Corporate Tax, each with different filing timelines.
Cash Flow Strain – Mismanaging VAT refunds and Corporate Tax payments can affect liquidity.
Documentation – Both taxes require detailed record-keeping and accurate reporting.
International Operations – For example, UK businesses expanding into Dubai must also navigate UK obligations, such as HMRC reporting and double taxation treaties.

How Businesses Can Stay Compliant

Register promptly with the FTA for both VAT and Corporate Tax.
Maintain accurate records of invoices, expenses, and profits.
Use accounting systems that handle both VAT and Corporate Tax calculations.
Seek expert advice to manage cross-border tax obligations and avoid penalties.

10 Tips to Future-Proof Your Tax Strategy in the UAE

With VAT (2018) and Corporate Tax (2023), the UAE’s tax system has changed forever. To avoid penalties and keep your business future-ready, here are 10 quick tips:

Keep Updated: The Federal Tax Authority (FTA) often issues new rules. Stay on top of updates.

Link Tax to Business Goals: Plan tax alongside expansion, investments, and restructuring.

Use Free Zone Incentives Wisely: Many zones offer 0% Corporate Tax, but only if you meet conditions.

Go Digital: Adopt accounting software that handles VAT and Corporate Tax filings in the UAE.

Watch Transfer Pricing: If you deal with related parties abroad, keep proper documentation.

Maintain Strong Records: Invoices, receipts, and contracts must be audit-ready at all times.

Combine VAT & Corporate Tax Planning: Manage both together to avoid cash flow surprises.

Prepare for Global Changes: Large groups face a 15% tax from 2025, and more reforms may follow.

Train Your Finance Team: Regular training helps prevent filing errors and delays.

Get Professional Help: Advisers can spot exemptions, structure deals, and guide audits.

Final Thoughts

The UAE continues to offer one of the most business-friendly environments globally, but with the introduction of Corporate Tax alongside VAT, companies must stay sharp on compliance.

VAT is about how you sell.
Corporate Tax is about how you profit.

Together, they shape how businesses plan, price, and grow in the UAE market. By understanding both systems and planning ahead, you can make the most of Dubai’s opportunities while staying fully compliant.

At present, VAT in the UAE is set at 5%, one of the lowest rates in the world. However, across the GCC, the average is higher; for example, Saudi Arabia increased its VAT to 15% in 2020. It is reasonable to expect that the UAE may eventually consider raising its VAT rate to bring it in line with regional standards and increase government revenue. While no official timeline has been announced, businesses should prepare for the possibility of a higher VAT rate in the future, which would directly impact pricing and consumer spending.

At Vista Corporate Group, we provide end-to-end support for businesses navigating the UAE’s VAT and Corporate Tax requirements. From VAT registration, return filing, and compliance management to corporate Tax planning, structuring, and annual filings, our team ensures your business remains fully compliant while maximising efficiency. With proactive advisory and seamless execution, we simplify complex regulations, reduce risks, and give you the confidence to focus on growth while we handle your tax obligations.

Frequently Asked Questions (FAQs)

1. Do businesses in the UAE need to pay both VAT and Corporate Tax?

Yes, in most cases. VAT is applied to the sale of goods and services (indirect tax), while Corporate Tax is applied to company profits (direct tax). Even if your company makes little or no profit (and pays no Corporate Tax), you may still have VAT obligations if your turnover exceeds AED 375,000.

2. What is the VAT rate in the UAE?

The standard VAT rate is 5%. This is charged on most goods and services, though certain categories like education, healthcare, and exports may be zero-rated (0%) or exempt from VAT.

3. What is the Corporate Tax rate in the UAE as of 2025?

Corporate Tax is levied on business profits at:

0% for taxable income up to AED 375,000
9% for taxable income above AED 375,000
15% for multinational enterprises with global revenues over EUR 750 million (effective 2025, under OECD Pillar Two rules).

4. Who is required to register for VAT in the UAE?

Businesses must register for VAT if their annual turnover exceeds AED 375,000. It’s a mandatory VAT registration threshold in the UAE. Voluntary registration is possible if turnover is above AED 187,500.

5. Who is required to pay Corporate Tax in the UAE?

Corporate Tax applies to:

All companies incorporated in the UAE.
Branches of foreign companies with operations in the UAE.
Free zone companies (though they may enjoy exemptions if they carry out qualifying activities and meet compliance rules).

6. How often do VAT returns need to be filed?

VAT returns are generally filed quarterly, though some businesses may need to file monthly depending on their turnover and the Federal Tax Authority’s (FTA) requirements. Corporate Tax, on the other hand, is filed annually.

7. Can free zone companies avoid VAT and Corporate Tax?

Not entirely. Free zone businesses may benefit from 0% Corporate Tax if they only carry out qualifying activities and meet conditions set by the FTA. However, free zone companies must still comply with VAT regulations if their turnover exceeds the threshold.

8. What expenses are deductible under Corporate Tax?

Ordinary and necessary business expenses, such as salaries, rent, utilities, professional fees, and operating costs, are usually deductible. However, fines, penalties, and certain non-business expenses cannot be deducted when calculating taxable income.

9. What happens if a business fails to register or comply with VAT and Corporate Tax rules?

Non-compliance can lead to hefty penalties. For VAT, fines may include late registration, incorrect filing, or failure to issue proper tax invoices. For Corporate Tax, penalties can apply for late filing, inaccurate reporting, or underpayment of tax.

10. Are small businesses and startups affected by Corporate Tax in the UAE?

Yes, but with relief. Small businesses with profits below AED 375,000 pay 0% Corporate Tax. However, they still need to file tax returns to declare their income. VAT may still apply if their turnover crosses the threshold.

11. How can businesses prepare for both VAT and Corporate Tax compliance?

Keep accurate records of all transactions.
Use accounting software that can handle VAT and profit calculations.
Train staff on tax requirements.
Work with tax advisers to align both UAE and home-country obligations

Tip: Treat VAT as a short-term compliance obligation and Corporate Tax as part of your long-term financial planning.