UAE VAT Law Changes 2026: Input Tax Recovery, Supplier Checks & Employee Costs

Summary: The United Arab Emirates introduced important changes to its Value Added Tax framework through Cabinet Decision No. 149 of 2026 and Federal Tax Authority Decisions No. 13 and 17 of 2026. These amendments primarily strengthen evidence, compliance and input tax recovery requirements rather than changing the standard VAT rate of 5% or the mandatory VAT registration threshold of AED 375,000. The changes include restrictions on input tax recovery for cash-paid supplies above a prescribed threshold, revised rules for composite supplies, amendments to the Profit Margin Scheme and a future transition to turnover-based input tax apportionment for partially exempt businesses. The revised apportionment provisions apply from the first tax year commencing after 1 October 2027. Under the amended Profit Margin Scheme, purchase-related expenses may be included in the purchase price only where input tax on those expenses is legally non-recoverable. FTA Decision No. 13 of 2026 introduces supplier and transaction verification requirements, emphasising documented Know Your Supplier procedures rather than relying solely on possession of a tax invoice. The source material also identifies small-supply thresholds of AED 10,000 and annual supplier transactions of AED 100,000 as relevant to verification. Separately, FTA Decision No. 17 of 2026 identifies six categories of qualifying employee expenses, including transportation, remote-site meals, accommodation, telecommunications and business parking, subject to prescribed conditions. Businesses should review their payment procedures, supplier verification records, input tax recovery calculations and employee benefit policies to ensure compliance with the revised UAE VAT framework.

Key Changes in UAE (Dubai) VAT Law Effective 1 October 2026

(Announced on 28th Sep 2026, Effective from 01-10-2026)
Cabinet Decision No. 149 of 2026 (amending the VAT Executive Regulation)
Federal Tax Authority (FTA) Decision No. 13 & 17 of 2026 (under Article 54 bis)

A. Changes Implemented by Cabinet Decision No. 149 of 2026

1. VAT Rate and Registration Threshold Remain Unchanged

This is an evidence regime, not a rate change. The standard 5% VAT rate and the AED 375,000 registration threshold have not changed.

2. Input Tax Recovery Restrictions on Cash Payments

The way you pay now decides whether you recover. Cabinet Decision No. 149 of 2026 adds a rule blocking input tax recovery on a supply above a value still to be set by the Minister of Finance where the consideration is paid, or intended to be paid in cash.

3. Turnover-Based Input Tax Apportionment for Partially Exempt Businesses

Partially exempt businesses move to an output-based apportionment.

The partially exempt family holding loses the most. For mixed-use/residual input tax, the recoverable share is calculated using a turnover-based ratio rather than an input tax ratio.

Capital asset disposals and transactions subject to the reverse charge mechanism (Concerned Goods/Services under Article 48) are excluded from the turnover ratio calculation.

Effective from the first tax year commencing after 1 October 2027.

4. Regulatory Adjustments to Composite Supplies

Artificial splitting of composite supplies is prohibited. Interconnected components that naturally form a single commercial transaction will be treated as a single composite supply.

The tax rate or exemption of the principal component dictates the treatment of the entire bundle.

5. Changes to the Profit Margin Scheme

The Profit Margin Scheme allows dealers of second-hand goods, such as used cars or antiques, to pay 5% VAT only on their profit margin (Selling Price − Purchase Price) rather than the full sales value.

The Old Rule: When calculating the “purchase price” to find their profit margin, businesses would often add buying expenses—such as transportation, auction fees and refurbishment costs—directly to the car or item’s cost. This inflated the purchase price, shrank the taxable profit margin and allowed businesses to simultaneously recover the input VAT paid on those services.

The New Rule: Under the amendment, purchase-related costs and fees can only be added to the purchase price if the input VAT on those costs is legally non-recoverable.

B. Changes Implemented by FTA Decisions No. 13 and 17 of 2026

6. Mandatory Supplier Due Diligence — FTA Decision No. 13 of 2026

Holding a valid invoice is no longer sufficient for input VAT recovery. Businesses must document “Know Your Supplier” (KYS) checks.

Businesses must verify the supplier and maintain a documented policy, with verification repeated every 12 months as described in the source material.

A valid tax invoice will no longer be sufficient for automatic input VAT recovery. The three instruments introduce requirements for businesses to substantiate the supplier, the supply and the payment.

Small supplies below AED 10,000 are generally identified as exempt from certain verification requirements unless annual transactions with a supplier exceed AED 100,000, subject to the conditions of the FTA Decision.

The FTA may deny input tax recovery where connections with tax evasion are established and required verification procedures have not been performed.

7. Input VAT on Employee Expenses — FTA Decision No. 17 of 2026

Employee expenses are subject to specified categories and recovery conditions under FTA Decision No. 17 of 2026.

The decision identifies the following six categories of qualifying employee expenses:

• Work transportation: Transportation provided to employees for business purposes, subject to the applicable conditions.
• Food at remote sites: Meals provided to employees working at remote or isolated locations.
• Operational accommodation: Employee accommodation required for operational or employment-related purposes.
• Short-term accommodation for new employees: Temporary accommodation provided to newly recruited employees, subject to the prescribed conditions.
• Work telecommunications: Telecommunications services provided for the performance of employment duties.
• Business parking: Parking facilities or reimbursements connected with employees’ business activities.

Each category is subject to relevant conditions concerning a genuine business purpose, restrictions on cash-allowance alternatives where applicable and the maintenance of appropriate documentary policies.

Employer-provided accommodation is otherwise recoverable under the specific statutory treatment where the Ministry of Human Resources and Emiratisation requires its provision.