What is VAT in the UAE?

Value Added Tax (VAT) was rolled out in the UAE on 1 January 2018 at a flat rate of 5%. The new tax was introduced to provide the government with an additional source of income, outside of oil revenues, with which to provide a range of high-quality public services.

Value-Added Tax (VAT) is a tax on the value added to goods and services at each stage of production and distribution. VAT was introduced in the United Arab Emirates (UAE) on January 1, 2018, as part of a larger effort to diversify the country’s revenue sources and reduce its dependence on oil.

In the UAE, VAT is levied at a standard rate of 5% on the supply of most goods and services. However, some goods and services are exempt from VAT, such as basic food items, healthcare, education, and residential properties.

Businesses with a taxable supply of goods or services above the mandatory registration threshold of AED 375,000 per annum are required to register for VAT. Once registered, businesses must charge VAT on their taxable supplies and file periodic VAT returns with the Federal Tax Authority (FTA).

VAT has had a significant impact on businesses and consumers in the UAE. Businesses must now factor in the cost of VAT when setting prices, while consumers are paying more for goods and services due to the added tax. However, the implementation of VAT has also helped improve the country’s fiscal position and increase transparency in the economy.

In conclusion, VAT is a crucial aspect of the UAE’s tax system and has helped diversify the country’s revenue sources and increase transparency. Businesses must comply with the VAT regulations to avoid potential penalties and maintain their good standing.

How is VAT calculated in the UAE?

You must register for VAT in the UAE if your taxable supplies and imports exceed AED 375,000.
You can also register to pay VAT voluntarily if your taxable supplies and imports exceed AED 187,500.
VAT is collected by a business from its customers and paid to the government. Any VAT paid by a VAT-registered business to its suppliers can be reclaimed from the government.

For the purposes of VAT, the UAE Federal Tax Authority (FTA) defines taxable supplies as supply of goods or services made by a business in the UAE that may be taxed at a rate of either 5% or 0%.
Imports are also taken into consideration for this purpose, if a supply of such goods or services would be taxable if made within the UAE.

Value-Added Tax (VAT) in the United Arab Emirates (UAE) is calculated based on the value added to goods and services at each stage of production and distribution. The calculation of VAT is as follows:

1. Taxable supply: The first step in calculating VAT is to determine whether a supply is taxable or exempt. Taxable supplies are subject to VAT at the standard rate of 5%, while exempt supplies are not subject to VAT.

2. VATable amount: The VATable amount is the value of the taxable supply, excluding VAT. This is the amount on which VAT will be calculated.

3. VAT amount: The VAT amount is calculated by multiplying the VATable amount by the VAT rate of 5%. For example, if the VATable amount is AED 1,000, the VAT amount will be AED 50 (1,000 x 0.05).

4. Tax invoices: Businesses must issue tax invoices for all taxable supplies, showing the VATable amount, VAT amount, and the total amount payable, including VAT.

5. VAT return: Businesses must file periodic VAT returns with the Federal Tax Authority (FTA), showing their taxable supplies and exempt supplies, the VATable amount, VAT amount, and any input tax (VAT paid on purchases) that can be claimed as a credit.

In conclusion, VAT in the UAE is calculated based on the value added to goods and services at each stage of production and distribution. Businesses must charge VAT on their taxable supplies, issue tax invoices, and file periodic VAT returns with the FTA to comply with the VAT regulations.

What companies are exempt from VAT in the UAE?

VAT is applicable to businesses both on the UAE mainland and within free zones outside of defined ‘designated zones’. VAT registration is mandatory if your business meets either of the following criteria:

• The total value of your taxable supplies made within the UAE exceeds AED 375,000 over the previous 12-month period.
• You anticipate making taxable supplies with a value exceeding AED 375,000 within the next 30 days.

In the United Arab Emirates (UAE), some companies are exempt from Value-Added Tax (VAT). The following categories of companies are exempt from VAT:

1. Non-profit organizations: Non-profit organizations that are established for charitable or humanitarian purposes and have been registered with the relevant authorities are exempt from VAT.

2. Healthcare providers: Healthcare providers that are registered with the relevant authorities and provide medical treatment, care, and support are exempt from VAT.

3. Educational institutions: Educational institutions that are registered with the relevant authorities and provide education, training, and research are exempt from VAT.

4. Residential properties: Residential properties, including the sale and lease of residential buildings, are exempt from VAT.

5. Certain financial services: Certain financial services, including the issuance, sale, and redemption of insurance policies, and the management of funds, are exempt from VAT.

It is important to note that while these companies are exempt from VAT, they may still be required to register for VAT and comply with other VAT requirements.

In conclusion, some companies in the UAE are exempt from VAT, including non-profit organizations, healthcare providers, educational institutions, residential properties, and certain financial services. Companies must comply with the VAT regulations, including registering for VAT and filing periodic VAT returns, even if they are exempt from VAT.

How to pay VAT in the UAE?

To pay VAT in the UAE, you’ll first need to register. You can do this on the Federal Trade Authority website.
You will be asked to complete an application form and submit the following:

• Personal details
• Contact information
• Banking information
• Business information – including those you have business relationships with

VAT returns can then be submitted via the FTA eServices portal. To submit a return:

• Log in to eServices and click the VAT tab.
• Complete the form including details of your income and VAT calculation.
• Submit your return.
• Make your VAT payment.

Economic Substance Regulation (ESR)

 

The Economic Substance Regulation (ESR) is a set of regulations issued by the United Arab Emirates (UAE) to promote transparency and combat harmful tax practices. The ESR requires UAE-based businesses that carry out certain activities to meet economic substance requirements. Here are some key aspects of ESR compliance in the UAE:

1. Legal Framework: The ESR is governed by Cabinet Resolution No. 31 of 2019, as amended by Cabinet Resolution No. 57 of 2020.
2. Scope: The ESR applies to UAE-based businesses that carry out certain activities, including banking, insurance, intellectual property, holding company, shipping, and distribution and service center activities.
3. Economic Substance Requirements: UAE-based businesses that fall within the scope of the ESR are required to meet certain economic substance requirements, including having adequate premises, employees, and expenditure in the UAE, and conducting core income-generating activities in the UAE.
4. Notification and Reporting: UAE-based businesses are required to notify the relevant regulatory authority of their activities and whether they fall within the scope of the ESR, and to submit an annual report demonstrating compliance with the economic substance requirements.
5. Penalties: Penalties may be imposed for non-compliance with the ESR, including fines, suspension or revocation of licenses, and reputational damage.
6. Regulatory Oversight: The regulatory authority responsible for overseeing ESR compliance varies depending on the activity carried out by the business, and may include the Ministry of Economy, the Dubai International Financial Centre, or the Abu Dhabi Global Market.

Adhering to ESR compliance regulations helps to ensure that businesses operate with transparency and in compliance with international tax standards, and helps to promote the UAE’s reputation as a global business hub.

Corporate Tax in UAE from 1st June ’23 – Top 7 Questions Answered

1. What is corporate tax in UAE?
Corporate tax is a form of direct tax levied on the net income or profit of corporations and other business entities. It is also commonly known as ‘Corporate Income Tax’ or Business Profits Tax.’
In simple words, it is a tax levied on the net profit made by the businesses. It requires companies to pay a certain percentage of profit as tax.

2. Who should pay corporate tax in the UAE?
All the businesses whose taxable profit (net) is more than 375,000 AED fall under the purview of corporate tax and are required to pay a certain percentage of net profit as corporate tax.

3. What is the rate of corporate tax in the UAE?
The corporate tax rate is at 9% of the net profit made by the businesses. In order extent support to small businesses and start-ups, the corporate tax rate will be ‘0’ % if the net profit is up to 3,75,000 AED.

4. What is the date of implementing the federal corporate tax in UAE?
The date of implementing the corporate tax is effective from the financial year starting on or after 1st June, 2023.

5. When will the corporate tax law be released by the authorities?
The authorities already released the corporate tax law on 9th December 2020. The UAE corporate tax is made available through a ‘Federal Decree-Law no. 47 of 2022 on their official website. To download the UAE corporate tax law, you can visit the Ministry of Finance website.

6. What are the businesses or incomes that are outside the scope of corporate tax?
Given the profit threshold of 3,75,000 AED, all businesses that exceed the threshold have to pay the corporate tax. However, certain types of business or income are exempt from corporate tax. Below is the list of companies or income exempt from corporate tax:
Individuals will not be subject to corporate tax. As a result, any income from employment, real estate, investments in shares, and other personal income unrelated to a trade or business in the UAE will be exempt from corporate tax
Not applicable to foreign investors who do not carry on business in UAE
Corporate tax incentives are currently being offered to free zone businesses that comply with all regulatory requirements will continue.
Capital gains and dividends received by UAE businesses from its qualifying shareholdings are exempt from corporate tax
Not applicable on qualifying intragroup transactions and restructurings.

7. How is corporate tax in UAE calculated?
Corporate tax in UAE is calculated at 9% of the net profit shown in the company’s financial statements. The 9 % corporate tax will be levied only if the taxable net profit exceeds 375,000 AED. In other words, the net profit up to 3,75,000 AED is taxed at 0%.
For example, If the net profit is 4,75,000 AED, the corporate tax will be 9,000 AED (4,75,000-3,75,000 X 9/100)