Corporate Tax and VAT in Dubai: Key Differences Every Entrepreneur Must Know | Ghalib Consulting

Corporate Tax and VAT: What Dubai Entrepreneurs Must Know in 2025

Introduction: Two Taxes, Two Rules

When I sat down with a client last month—a Dubai-based e-commerce founder who’d just crossed the AED 375,000 revenue mark—she asked me a question I hear almost daily: “So, do I pay 5% or 9%? And wait, do I charge my customers extra or just pay from my profits?”

If you’re an entrepreneur in the UAE, you’ve likely felt this same confusion. You’re not alone.

The UAE’s tax landscape has transformed dramatically since 2018. What was once a zero-tax environment now includes both Corporate Tax and VAT—two distinct systems with different purposes, rates, and compliance rules. Understanding the difference isn’t just about avoiding penalties; it’s about protecting your margins and pricing your services correctly .

Let me walk you through everything you need to know, drawing from real conversations with founders just like you.

The Fundamental Difference: Direct vs. Indirect Taxation

Here’s the simplest way to think about it:

Corporate Tax is a direct tax on your profits. It comes out of what you keep.

VAT is an indirect tax on consumption. It passes through your business to the government, ultimately paid by your customers .

Think of Corporate Tax as something that affects your bottom line, while VAT affects your cash flow and pricing. They’re fundamentally different animals, and treating them the same way is where many entrepreneurs get into trouble .

Corporate Tax in Dubai: What You Actually Pay

The Rates That Matter

The UAE introduced Corporate Tax under Federal Decree-Law No. 47 of 2022, applying to financial years starting on or after June 1, 2023 . Here’s what it looks like in practice:

Let me give you a real example from a client who runs a digital marketing agency in Dubai. Last year, her profit was AED 820,000. Here’s what she actually paid:

• First AED 375,000 → AED 0 tax
• Remaining AED 445,000 → 9% tax = AED 40,050

She kept AED 779,950 of her profit after tax. That’s the reality of Corporate Tax in the UAE—it only applies to the slice above the threshold, not your entire revenue .

Who Pays Corporate Tax?

Corporate Tax applies to:

• UAE mainland companies
• Free zone companies (on taxable income portions)
• Foreign companies with a permanent establishment in the UAE
• Entrepreneurs operating registered business entities 

Important distinction: It does NOT apply to personal income—salaries, freelance income under your own name, or personal investments not tied to a company .

VAT in Dubai: The 5% Reality

How VAT Actually Works

VAT (Value Added Tax) was introduced on January 1, 2018, at a standard rate of 5% . Unlike Corporate Tax, which you pay once a year from your profits, VAT is collected on every transaction and remitted quarterly.

Here’s the critical distinction that trips up new entrepreneurs:

• You charge 5% VAT on your taxable UAE sales
• You pay VAT on your business purchases
• You remit the difference to the Federal Tax Authority (FTA) 

VAT Registration Thresholds

Not every business needs to register for VAT immediately. The rules are threshold-based:

Many founders register voluntarily even before crossing the mandatory threshold—especially if they’re spending heavily on growth and want to reclaim VAT on expenses like software, ads, or supplier payments .

The Comparison: Corporate Tax vs. VAT Side by Side

Let me put this in a table that I use with all my clients. Bookmark this—it’ll save you countless hours of confusion:

The Free Zone Advantage: Where Things Get Interesting

This is where Dubai’s tax environment becomes genuinely unique for entrepreneurs.

If you operate from a Qualifying Free Zone—like Meydan Free Zone, DMCC, or IFZA—you may qualify as a Qualifying Free Zone Person (QFZP). This status can unlock 0% Corporate Tax on qualifying income .

What Qualifies for 0% Corporate Tax?

Generally, income qualifies if it comes from:

• Other free zone entities
• International clients (outside the UAE)
• Transactions related to your licensed free zone activities 

What About VAT in Free Zones?

Here’s a myth I hear constantly: “I’m in a free zone, so I don’t pay VAT.”

Not quite right.

If your free zone is a non-designated zone (like Meydan Free Zone), standard VAT rules apply:

• Domestic UAE sales → 5% VAT
• Exports of goods/services outside UAE → 0% VAT
• You can still reclaim input VAT on UAE expenses 

The key takeaway: Free zone status helps with Corporate Tax, but VAT depends on where your customers are, not where you’re located.

Real-World Scenarios: How This Affects Your Business

Let me walk you through three common scenarios I’ve seen with clients.

Scenario A: The Service Exporter

Business: Dubai-based consulting firm serving Saudi clients
VAT: 0% on exports (no VAT charged)
Corporate Tax: 9% on profits above AED 375K

Scenario B: The E-commerce Retailer

Business: Online store selling to UAE consumers
VAT: Must charge 5% on all sales, file quarterly returns
Corporate Tax: Same 9% on profits above threshold

Scenario C: The Free Zone Tech Startup

Business: SaaS company selling globally from Meydan Free Zone
VAT: 0% on international sales, can reclaim input VAT
Corporate Tax: May qualify for 0% as QFZP if meeting conditions

Compliance: What You Actually Need to Do

Corporate Tax Compliance

• Register with FTA for Tax Registration Number (TRN)
• File annual return within 9 months of financial year-end
• Maintain records for 7 years
• Audited statements required if revenue > AED 3 million 

VAT Compliance

• Register within 30 days of crossing AED 375K threshold
• File quarterly returns by 28th day after quarter-end
• Issue VAT-compliant invoices with your TRN
• Maintain records for 5 years (15 years for real estate) 

Penalties: What Happens If You Get It Wrong

The FTA takes compliance seriously. Here are the penalties I’ve seen catch entrepreneurs off guard:

Corporate Tax Penalties:

• Late registration: AED 10,000
• Late filing: AED 10,000 for delays up to 90 days, increasing to AED 50,000 for longer delays
• Late payment: 5% of unpaid tax per month (max 25%) 

VAT Penalties:

• Late filing: AED 1,000 first offence, AED 2,000 for repeat within 24 months
• Late payment: 2% penalty plus daily accruals
• Incorrect returns: Up to 50% of tax difference 

The good news? With proper planning, these penalties are entirely avoidable.

Strategic Takeaways for Dubai Entrepreneurs

After working with dozens of founders across the UAE, here’s what I’ve learned about navigating Corporate Tax and VAT successfully:

1. Register early, even if you don’t owe tax. Corporate Tax registration is mandatory for all businesses. Don’t wait .
2. Know your VAT threshold. Monitor your 12-month rolling turnover. The moment you cross AED 375K, you have 30 days to register .
3. Structure matters for free zone companies. If you want that 0% Corporate Tax rate, ensure your business activities and income sources qualify under QFZP rules .
4. Price correctly. If you’re VAT-registered, your prices to UAE customers should include or clearly exclude VAT. International clients should see 0% VAT on invoices .
5. Keep records religiously. Both tax regimes require robust documentation. Set up your accounting systems early.

Looking Ahead: What’s Changing in 2025

The UAE’s tax framework continues to evolve. Key developments to watch:

• Full enforcement of Corporate Tax for all businesses 
• Stricter compliance requirements for free zone entities claiming 0% tax
• Potential expansion of e-invoicing requirements
• Continued alignment with global tax standards (BEPS Pillar 2 for large multinationals) 

Conclusion: Knowledge Is Your Best Tax Strategy

Here’s the truth about Corporate Tax and VAT in Dubai: neither is designed to punish entrepreneurs. The UAE deliberately kept rates low and thresholds reasonable to preserve its competitive edge .

The founders who struggle are the ones who treat both taxes as an afterthought. The ones who thrive—who keep more of what they earn and sleep soundly at night—are those who understand the rules early and build compliance into their operations from day one.

You don’t need to become a tax expert. But you do need to know the difference between a tax on your profits and a tax that passes through your business. That single distinction will save you from pricing mistakes, cash flow crunches, and compliance headaches.

Need Help Navigating UAE Taxation?

At Ghalib Consulting, we help Dubai and Saudi entrepreneurs understand and optimize their tax positions. Whether you’re trying to qualify for free zone Corporate Tax benefits, register for VAT correctly, or simply understand what applies to your business, we’re here to help.

Book a free consultation with our team today. We’ll review your business structure, explain your obligations, and help you build a tax strategy that protects your margins and supports your growth.

👉 [Contact Ghalib Consulting for Your Free Tax Assessment]