Corporate Tax and VAT

One of the transformational changes in recent years has been the introduction of a federal Corporate Tax (CT) on business profits, and business owners need to also stay on top of the current Value Added Tax (VAT) obligations. Knowing about CT and VAT will ensure you don't fall out of compliance, get caught off guard but also help to plan your growth accordingly for your business.

What is the Corporate Tax in the UAE?

The UAE has introduced federal Corporate Tax to be applied across all of the Emirates, including Dubai. The CT applies to any financial year starting on or after 1 June 2023 (subject to when your business has a financial year starting). This means that if your business has afinancial year starting on or after that date, then you are impacted by the new regime.

Under this regime

• For taxable income up to AED 375,000, the tax rate is 0%.
  
• For taxable income above that threshold, the rate is 9%.
• The tax applies to most entities including mainland companies,     free zone companies (with special rules), and foreign entities operating     through a permanent establishment in the UAE.

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Why Was Corporate Tax Introduced?

The UAE has historically been alow-tax/tax-free area, however, the introduction of a formal corporate tax regime is part of a broader economic and regulatory strategy. The intent, according to the UAE government, is to solidify the UAE's standing as a global investment hub and to align with worldwide standards for transparency an danti-base erosion. For owners, this means the landscape is changing - but in general tax rates are competitive with other countries.

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Who Must Pay Corporate Tax?

Most businesses operating in Dubai will come under the CT rules. Some of the key categories

• Mainland companies incorporated or managed in the UAE.    
  
• Free zone companies, though they may be eligible for special     exemptions if certain conditions are met.
• Foreign entities that have a permanent establishment in the     UAE.
• Even individuals running a business (for example licensed sole     proprietors) may be subject if their revenue crosses certain thresholds.

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Key Provisions & Exemptions You Should Know

• Qualifying Free Zone Persons (QFZPs): If your business is in a Free Zone and meets specified criteria (e.g., deriving “qualifying income,” maintaining substance in the UAE, not carrying out excluded activities) you may qualify for a 0% CT rate on that income.
  
• Small Business Relief: For tax periods ending on or before 31 December 2026, resident businesses with revenues under AED 3 million may treat their taxable income as zero.
  
• Exempt Entities: Some entities,  such as natural resource extraction companies, government-entities, or approved investment funds may be exempt or subject to different rules.
  

It’s important: exemptions aren’t automatic. You’ll still need to ensure eligibility, maintain records, and meet on going conditions.

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How Corporate Tax Works in Practice

• ‍Registration & Deadlines
  Everybusiness liable for CT must register with the Federal Tax Authority(FTA). Registration is usually required within three months from trade-license issuance (or as specified) and must occur before the deadline relevant to your situation. Individuals conducting business or professional activities in the UAE are also required to register for Corporate Tax if their annual business income exceeds AED 1 million. Registration in such cases must be completed by 31 March of thefollowing year after the year in which the AED 1 million threshold was crossed.‍
• Filing & Payment
  After the end of your financial year, youwill need to prepare and file a CT return, which is to be completed within ninemonths of the end of the financial year. The tax is based on your taxableearnings, starting with your accounting net profit, and then adjusting foritems that are not deductible (think fines, donations to unapproved bodies,exempt income, transfer pricing adjustments, etc.).‍
• Failures and Penalties
  ‍If you fail to register, file your returnlate, don’t maintain proper records or pay the tax on time, you may facesignificant penalties. Here are the examples.
  - Failure to register: AED 10,000
  - Late filing: AED 500 per month (up to 12months, thereafter AED 1000 per month)
  - Failure to maintain records: AED10,000–20,000
  - Late payment: 14% per annum on the unpaid sum

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VAT in the UAE

‍Many companies in the United Arab Emirates are subject to VAT (value-addedtax) regulations in addition to corporate tax. The majority of goods andservices were subject to a standard rate of 5% when the VAT was firstintroduced in January 2018. An organization must surpass the AED 375,000threshold of taxable supplies in order to be required to register for VAT. Thetwo systems (CT and VAT) operate independently to apply to organisations but at distinct levels.

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How Value Added Tax (VAT) Works in Practice

• ‍Registration and Deadlines
  Every business that makes taxable supplies in the UAE must register for VAT with the Federal Tax Authority (FTA) if it meets the following thresholds:‍
• Mandatory Registration
  Required if your taxable supplies and imports exceed AED 375,000 in the past 12 months within 20 working days ofcrossing the threshold.‍
• Voluntary Registration
  You may voluntarily register if your taxable supplies or expenses exceed AED 187,500 in the past 12 months or are expected to exceed that amount in the next 30 days.‍
• Filing and Payment
  Businesses that are registered for VAT are required to submit VAT returns to the FTA on a regular basis (usually quarterly, but occasionally monthly, as determined by the FTA).

After the end of the tax period, each VAT return must be filed within 28 days. The VAT that must be paid (or reimbursed)is determined by subtracting:

Output VAT:VAT you charge on sales and supplies; and

Input VAT:VAT you pay on purchases and expenses.

If your output VAT exceeds your input VAT, you must pay the difference to the FTA. If your input VAT exceeds your output VAT, you may carry forward or request a refund. All VAT payments must be made within the filing deadline to avoid penalties

Non-Compliance and Penalties

Failure to adhere to VAT laws may lead to various fines and penalties imposed by the FTA. The common ones are:

• AED 10,000 for not registering
• AED 1,000 for the first infraction and AED2,000 for each subsequent infraction within 24 months if the VAT return is filed after the deadline.
• AED 10,000 for the first offense and AED20,000 for subsequent offenses for failing to maintain proper documentation
• Not displaying prices that include VAT: AED5,000
• Erroneous VAT Return: AED 2,000 for repeat offenses, AED 1,000 for first offenses.

The Significance of It for Entrepreneurs

Practically speaking, if you run a business in Dubai or the UAE, you must include CT (and VAT, if applicable) in your financial planning.The good news is that the 0% rate up to AED 375,000 helps alot of smaller businesses. However, any profits exceeding that point will trigger a rate of 9%, which many global jurisdictions would regard as low.

If they are within a Free Zone or are in amultinational group, it is important to know whether you are qualified for QFZP tax rates or that you are not in scope of the global minimum tax rules (meaning any large multinational groups, or the top-up tax from January 2025 at15%). 

If you are unmanaging these rules orunaware, it means raising your unplanned costs, causing delays in your businessdecision, and regulatory risk.
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Practical Advice for Business Owners & SMEs

• Keep good records: Your financial  statements must agree to your CT filings. You need accounting that is solid and audit-trimmed.  
• Don't take it for granted: Being located in a Free Zone does not guarantee you are entitled to a 0% rate if  you do not comply with each and every requirement of the regime.
  
• Be mindful to plan for VAT + CT: A business could be obliged to deal with both regimes at the same time.
     
• Consider your year-end dates: These could determine when CT applies, and importantly when you need to file a     return. 
• Keep an eye on your profit: You will want to have a plan in place for the rate change if you near the AED 375k credit threshold.
  
• Get professional help: Tax legislation is changing fast, and it can be complicated. An advisor cannot only assist you with claiming benefits and filing returns before  deadlines, but they will also help you avoid costly penalties.
        

Let’s Make Corporate Tax Simple Together

The UAE’s corporate tax regime represents a shift in the landscape - but it’s designed to be competitive and business friendly. With a 0% rate for smaller profits and 9% above the threshold, the framework gives businesses clarity and predictability. Alongside the enduring VAT regime in Dubai, business owners must keep an eye on and be involved in.

If you conduct business in Dubai and you have not yet undertaken a complete evaluation of your CT and VAT obligations, now is the time to do so. With appropriate preparation and professional assistance, compliance, increased tax efficiency, and continued development ofyour business will be achievable.