VAT and Corporate Tax in the UAE
The UAE has introduced taxes like VAT (Value Added Tax) and Corporate Tax to generate government revenue and support the country's development. Here’s a simple explanation of what they are, how they work, and who they affect:
1. VAT (Value Added Tax) in the UAE
What is VAT? VAT is a type of sales tax that is added to goods and services. It's a tax on the value added to a product or service at each stage of production or delivery. In simple terms, it’s like a small percentage added to the price you pay when buying goods or services.
How Does VAT Work in the UAE?
Standard Rate: The standard VAT rate in the UAE is 5%. This means that when you buy most goods or services, the seller adds 5% of the price as tax.
Who Pays VAT?: Consumers (buyers) pay VAT when they purchase goods or services. Businesses collect the VAT on behalf of the government.
Who Charges VAT?: Businesses that are registered for VAT (those with annual turnover above a certain threshold, currently AED 375,000) must charge VAT on the goods or services they sell.
How Businesses Handle VAT:
Businesses that charge VAT on sales can also claim back VAT they paid on their own purchases (this is called "input VAT").
The difference between the VAT charged to customers (output VAT) and the VAT paid on purchases (input VAT) is sent to the government.
2. Corporate Tax in the UAE
What is Corporate Tax? Corporate tax is a tax that businesses pay on their profits. It’s a percentage of the money a company earns after expenses like salaries, rent, and materials are deducted. This tax is paid to the government.
How Does Corporate Tax Work in the UAE?
General Corporate Tax: Starting from June 2023, the UAE introduced a 9% corporate tax on businesses with profits exceeding AED 375,000. This is the first time the UAE has implemented a corporate tax on businesses. Previously, the UAE had no corporate tax for most businesses.
Who Needs to Pay Corporate Tax?: Only businesses that make profits over AED 375,000 are subject to the 9% tax. Smaller businesses (with profits below this threshold) do not have to pay corporate tax. Some specific types of business, like those in free zones, may also have exemptions depending on the rules of the free zone.
