What is the difference between corporate tax and VAT?
Corporate Tax and Value Added Tax (VAT) are distinct forms of taxation, each targeting different aspects of business and consumer activity.
Corporate Tax:
A direct tax is imposed on the profits generated by businesses and companies. It applies to the net income or profit made by a company after deducting expenses.
Governments use corporate tax to generate revenue from business activities, usually calculated on annual profits.
The UAE has implemented a corporate tax rate of 9%, applicable to businesses with profits exceeding AED 375,000, starting June 2023.
Corporate tax is paid by businesses, not individuals. It includes Free Zone entities, mainland companies, and multinational corporations.
Value Added Tax (VAT):
An indirect tax is applied to the consumption of goods and services. It is calculated at each stage of production or distribution, with the tax being passed on to the consumer.
VAT provides governments with a steady flow of income by taxing the value added to products or services at each production stage.
The VAT rate in the UAE is currently set at 5%, introduced in 2018.
Businesses collect VAT from customers and pay it to the government. Consumers bear the final cost, but companies handle the collection and remittance.
Key Differences:
- Corporate tax is direct (on profits), and VAT is indirect (on consumption).
- Corporate tax is paid by businesses on their profits, VAT is paid by consumers, but collected by businesses.
- Corporate tax is calculated on profit; VAT is calculated on the value added to goods or services.
Deadline for Corporate Tax Registration in the UAE
The UAE introduced a corporate tax system effective from June 1, 2023. All businesses that meet the threshold requirements must register for corporate tax.
Corporate Tax Registration Deadline:
Mandatory Registration Date: Businesses are required to register for corporate tax based on the start of their first financial year starting from or after June 1, 2023.
Who Should Register: All businesses generating more than AED 375,000 in annual profits must register for corporate tax.
Compliance: Failure to register within the stipulated time frame can result in penalties, including fines and restrictions on business activities.
Steps for Registration:
- Create an account on the Federal Tax Authority (FTA) website.
- Provide required details, including financial and business information.
- Submit the registration form and wait for approval.
What is a Natural Person in UAE Corporate Tax?
In the context of UAE corporate tax, the term natural person refers to individuals (as opposed to legal entities like corporations) who may be subject to corporate tax on certain activities.
Detailed Explanation:
A natural person is an individual human being (not a corporation or business entity) who may engage in economic activities, such as freelancing, self-employment, or owning sole proprietorships.
Corporate Tax Applicability:
Corporate Tax on Individuals: Although the UAE corporate tax primarily targets businesses, natural persons may also be liable for corporate tax if they engage in commercial activities that generate income above the set threshold (AED 375,000 annually).
Exemptions for Individuals: Not all individuals are subject to corporate tax. Salary income, dividends, and other personal income sources (unrelated to business activity) remain exempt from corporate tax.
When is a Natural Person Taxable: If a natural person conducts a business or commercial activity, such as running a sole proprietorship or earning income from freelancing, they may be liable to corporate tax if their income exceeds the threshold.
Business Activities of Natural Persons:
Freelancers, consultants, and small business owners who operate under a trade license or conduct economic activities are classified as natural persons under corporate tax law.
A freelance web developer earning more than AED 375,000 annually will be subject to corporate tax on the profits made from their business activities.
Exemptions for Natural Persons:
Salaries and Personal Income: Salaried individuals or those with personal investments are not subject to corporate tax.
Passive Income: Income from real estate held in a personal capacity, dividends from shares, and savings do not fall under corporate tax.
Corporate tax and VAT are essential revenue streams for the UAE government, yet they apply differently based on the nature of the activity. VAT impacts consumption, while corporate tax is a profit-based tax primarily targeting businesses. For natural persons, corporate tax may apply if they are conducting business activities above the threshold.