VAT and Corporate Tax for UAE Businesses

Most UAE businesses must check two main federal taxes: VAT under Federal Decree-Law No. 8 of 2017 and corporate tax under Federal Decree-Law No. 47 of 2022. Your duties depend on your turnover, activities, legal form, free zone status, and whether you make taxable supplies or taxable profits.

VAT and corporate tax are different obligations

VAT and corporate tax are both handled through the Federal Tax Authority, often called the FTA, but they work in very different ways. VAT is a transaction tax. It is usually charged to the customer at 5% on taxable supplies, then paid to the FTA after deducting recoverable input VAT on business costs. Corporate tax is a tax on business profit. It is calculated from accounting profit, adjusted under the corporate tax rules.

A business can have VAT duties even if it makes little or no profit. For example, a shop may sell AED 1 million of goods but break even after rent, salaries and other costs. It may still need to register for VAT because VAT looks mainly at taxable turnover, not profit. The same business may pay little or no corporate tax if its taxable income is low.

The opposite can also happen. A business may not be VAT registered because its supplies are outside the VAT registration threshold or are not taxable supplies. It may still have corporate tax registration and filing duties if it is a UAE company or a business carried on by a natural person within the corporate tax rules.

VAT registration: when your business must register

VAT registration is required when a business’s taxable supplies and imports exceed the mandatory registration threshold of AED 375,000. A business may apply for voluntary VAT registration if its taxable supplies and imports, or taxable expenses, exceed AED 187,500. These thresholds are important for mainland and free zone businesses. Being in a free zone does not automatically remove VAT duties.

For VAT, taxable supplies usually include standard-rated supplies at 5% and zero-rated supplies. Zero-rated supplies are still taxable supplies, even though VAT is charged at 0%. This matters because zero-rated exports can push a business over the VAT registration threshold. Exempt supplies are treated differently. Common examples include some financial services and some residential real estate supplies. If a business mainly makes exempt supplies, its VAT position needs careful review because it may not be able to recover much input VAT.

A business should monitor turnover on a rolling basis, not only at the financial year end. A common mistake is waiting until the annual accounts are finalised. That may be too late. If your business crosses the mandatory threshold, you should act quickly and apply through the FTA portal.

Example: a Dubai consulting company invoices AED 320,000 in taxable services over the last 12 months. It then signs a new contract worth AED 80,000. It should review VAT registration immediately because its taxable supplies may move above AED 375,000. If it delays, it may face late registration penalties and may still need to account for VAT from the correct effective date.

VAT invoicing, returns and record keeping

Once VAT registered, a business must charge VAT correctly, issue compliant tax invoices, file VAT returns and pay any net VAT due. VAT is not extra profit. It is collected from the customer for the tax system. Good cash flow planning is important because the FTA payment date may arrive before all customers have paid their invoices.

Most VAT returns are filed monthly or quarterly, as assigned by the FTA. The common filing and payment deadline is the 28th day after the end of the tax period. Businesses should always check the FTA portal because the portal shows the assigned tax period and filing deadlines.

A VAT return reports output VAT and input VAT. Output VAT is VAT charged on sales. Input VAT is VAT paid on business purchases and expenses. The business pays the difference if output VAT is higher. It may be in a refund position if recoverable input VAT is higher, subject to the FTA’s rules and review process.

You should keep clear records. These usually include tax invoices issued, supplier invoices, customs import documents, credit notes, contracts, bank records and working papers used for each VAT return. Poor records can cause problems during an FTA review or audit. If the FTA asks how a figure was calculated, the business should be able to explain it with documents, not only with a spreadsheet total.

Some supplies need extra care. Exports may be zero-rated only if the business holds the required evidence. Commercial property is usually subject to VAT. Many residential property supplies are exempt, but the first supply of a new residential building can be zero-rated in specific cases. Mixed businesses, such as real estate companies, clinics, schools or financial service providers, should review VAT recovery carefully.

Corporate tax registration, rates and filing

UAE corporate tax applies to financial years starting on or after 1 June 2023. It is governed by Federal Decree-Law No. 47 of 2022. The general corporate tax rate is 0% on taxable income up to AED 375,000 and 9% on taxable income above AED 375,000. This is a federal tax, so it applies across the UAE, including Abu Dhabi, Dubai, Sharjah and the other emirates.

Most UAE companies need to register for corporate tax with the FTA. This includes many mainland companies and free zone companies, even where the expected tax payable is nil. A corporate tax return is generally due within 9 months after the end of the relevant tax period, and tax payment is generally due by the same deadline.

Example: a UAE company with a financial year ending on 31 December 2025 usually has a corporate tax filing and payment deadline of 30 September 2026. A company with a 30 June 2026 year end usually has a deadline of 31 March 2027. The exact position should be checked against the FTA portal and the company’s registered details.

Taxable income starts from accounting profit, then tax adjustments are applied. These adjustments can cover exempt income, non-deductible expenses, related party transactions, tax losses and other items. Businesses should not assume that the profit in the management accounts is automatically the corporate tax figure.

Natural persons can also be within the corporate tax system if they carry on a business or business activity in the UAE and meet the relevant conditions. Salary income is not treated the same as business income. Personal investments and personal real estate investments also have their own treatment. If an individual holds a trade licence, runs a consultancy, sells goods online or carries on commercial activity in their own name, they should check whether corporate tax registration is required.

Free zones, small business relief and special cases

Free zone businesses need special attention. A free zone licence does not mean “no VAT” and does not always mean “no corporate tax”. For VAT, many free zone businesses are treated in the same way as mainland businesses. Some areas are treated as VAT designated zones for certain goods rules, but that does not make every transaction VAT-free. Services supplied from or to a free zone often need normal UAE VAT analysis.

For corporate tax, a qualifying free zone person may benefit from a 0% corporate tax rate on qualifying income if it meets the conditions under the corporate tax regime. Non-qualifying income can be taxed at 9%. Free zone businesses should look closely at their income streams, customers, substance, transfer pricing and records. A company that has both free zone and mainland income may need detailed classification.

Small Business Relief may help some resident taxable persons with revenue not exceeding AED 3 million, under Ministerial Decision No. 73 of 2023. The relief is available only for relevant tax periods within the stated time window and subject to conditions. It is not a blanket exemption from registration or record keeping. It also does not apply to every type of business. For example, qualifying free zone persons and certain multinational enterprise groups are outside this relief.

Groups should also be careful. VAT grouping and corporate tax grouping are possible in certain cases, but they are not the same thing. Joining a tax group can simplify filings, but it can also create joint responsibility. Related party transactions should be priced on an arm’s length basis for corporate tax. This matters for owner-managed groups, mainland and free zone structures, shared services, management fees, loans and intellectual property charges.

Common mistakes UAE businesses should avoid

One common mistake is treating VAT and corporate tax as the accountant’s problem only once a year. VAT is a live compliance duty. If invoices are wrong, if VAT is not charged when it should be, or if input VAT is claimed without evidence, the issue builds up every month or quarter. Corporate tax also needs planning during the year because the business may need proper accounts, related party support, tax loss tracking and evidence for reliefs.

Another mistake is ignoring the VAT threshold because customers are outside the UAE. Exports and some international services may be zero-rated, but they can still count as taxable supplies. This means a business with no VAT charged on invoices may still have to register for VAT and file returns.

A third mistake is assuming that “free zone” means no tax. Free zone entities still need to consider VAT registration, corporate tax registration and annual corporate tax filing. They must also check whether they meet the conditions for any 0% corporate tax treatment.

Businesses also make errors with owner expenses. Corporate tax generally requires business expenses to be properly connected to the business. Personal costs should not be mixed with company costs. For VAT, input VAT should be claimed only where the expense is for the business and the business holds the required tax invoice.

Late action is another risk. FTA administrative penalties can apply for late registration, late filing, late payment and incorrect returns. Voluntary disclosures may be needed if a filed VAT return or corporate tax return contains an error. It is usually better to correct a problem early than wait for an FTA audit.

What to do next

Start with a tax status check. List your licences, business activities, emirate, free zone or mainland status, annual revenue, expected revenue for the next 12 months, customer locations and supplier locations. Then separate your income into categories: UAE standard-rated sales, zero-rated exports, exempt income, out-of-scope income, free zone income, mainland income and any related party income. This gives you a practical map of your VAT and corporate tax position.

Next, check registration. If taxable supplies and imports are above AED 375,000, review mandatory VAT registration immediately. If they are above AED 187,500, consider whether voluntary VAT registration is useful, especially if you have input VAT on start-up or operating costs. For corporate tax, check whether your company or business activity must register with the FTA, even if you expect no tax payable.

Set up a calendar. Add VAT return dates from the FTA portal. Add your corporate tax return deadline, usually 9 months after your financial year end. Add reminders at least one month before each deadline. Do not wait for the due date to collect invoices and bank statements.

Improve your documents. Use accounting software that can issue UAE VAT tax invoices if you are VAT registered. Keep supplier invoices, contracts, customs papers, bank records and payroll records. For corporate tax, prepare annual financial statements and keep support for major expenses, shareholder transactions and related party charges.

Finally, get advice before major changes. Speak to a UAE tax adviser or lawyer before opening a free zone entity, restructuring a group, selling commercial property, signing large cross-border contracts, taking mainland income through a free zone company, or relying on Small Business Relief. These decisions can affect both VAT and corporate tax.

This article is general information about UAE law, not legal advice. Laws change and every situation is different. For advice on your own case, speak to a licensed UAE lawyer.

Related reading

• UAE Service Agreement Clauses: What to Include
• How to Amend a UAE Company MOA

Have a question about your own case? Ask LocalLaw AI and get a clear answer with the law behind it. Start for free