MIDDLE EAST TAX ALERT | UAE | Cabinet Decision No. 149 of 2026: Amendments to the VAT Executive Regulation
Key message The UAE Cabinet has amended the VAT Executive Regulation. Partially exempt businesses will move to an output-based input tax apportionment from the first tax year commencing after October 1, 2027, a statutory composite supply rule is introduced, and input tax recovery on employee benefits is placed on a more structured footing. Businesses should revisit VAT recovery processes, employee benefit arrangements and the treatment of bundled supplies. This alert sets out the position before and after each amendment and gives our view on what it means in practice. |
Overview
Cabinet Decision No. 149 of 2026 amends several provisions of Cabinet Decision No. 52 of 2017 on the Executive Regulation of Federal Decree-Law No. 8 of 2017 on Value Added Tax. It was issued on September 1, 2026, and, except for the new input tax apportionment rules, takes effect from October 1, 2026.
While some amendments clarify existing positions, others introduce substantive changes that may require businesses to revisit VAT recovery processes, employee benefit arrangements and the VAT treatment of bundled supplies.
At a Glance
| Provision | What has changed | Impact | Effective |
|---|---|---|---|
| Article 55(6), (7) and new (19) | Residual input tax apportionment moves from a ratio of “recoverable input tax to total input tax”, to a ratio of the value of supplies carrying input tax recovery to the value of all supplies. Government entities and charities retain the current input tax ratio. | HIGH | First tax year commencing after October 1, 2027 |
| Article 53(1)(c)(1) and (2) | Input tax on employee benefits clauses redrafted. “Designated Zone” becomes “any free zone”; employer accommodation is carved out unless mandated by MoHRE; the “necessary to perform their role / normal business practice” test is replaced by cases and conditions to be specified by the FTA. | HIGH | 1October 1, 2026 |
| Article 54(3) (new) | New denial of input tax recovery for any supply exceeding a value to be set by the Minister where the consideration is paid or intended to be paid in cash. | HIGH | October 1, 2026 |
| Article 4(6) (new) | A taxable person may not treat an economically inseparable multi-component supply as multiple supplies. Substance now overrides the separate pricing and single supplier conditions in Article 4(4). | HIGH | October 1, 2026 |
| Article 57(1) | A capital asset is redefined from “a single item of expenditure” to “a business asset with a cost” of AED 5 million or more. | MEDIUM | October 1, 2026 |
| Article 41(4) | The separate zero-rating limbs for “pharmaceutical products” and “medical equipment” are consolidated into a single “medical product” limb, to be defined by Cabinet Decision. | MEDIUM | October 1, 2026 |
| Article 29(5) | Acquisition costs and fees are added to the profit margin purchase price only where the input tax on them is not recoverable. | MEDIUM | October 1, 2026 |
| Article 52(2) | “Less than a month” is replaced with “less than 30 days”, aligning the wording with Article 31(2). | LOW | October 1, 2026 |
| Article 60(1)(a) | “Clearly displayed on the invoice” is corrected to “clearly displayed on the credit note”. | LOW | October 1, 2026 |
| HIGH IMPACT |
1. Input tax apportionment moves from an input-based method to an output-based method.
Article 55(6), (7) and new (19)
| Position to the 2027-28 tax year | Position from the first tax commencing year after October 1, 2027 |
|---|---|
Standard Method: Residual input tax was apportioned on an input tax ratio including reverse charge mechanism. The same method applied to all taxable persons, including government entities and charities. | Residual input tax is apportioned on a turnover ratio. New Clause 7(a) uses the value of supplies falling within Article 54(1) of the Decree-Law over the total value of all supplies. New Clause 7(b) removes supplies of capital assets attributable to the taxable person, and receipts of concerned goods and concerned services under Article 48, from that calculation. New Clause 6(d) moves government entities and charities out of the general method; new Clause 19 keeps them on an input tax ratio (same as the current method). |
What this means in practice:
- This is a significant change for businesses making exempt supplies and recovering only partial input tax.
- Reverse charge receipts leave the calculation entirely. They previously sat in the input tax pool on both sides of the calculation.
- Capital asset disposals and expenditure shall no longer distort the recovery ratio.
- Article 55(13) (application for a special method), Clauses 9 to 11 (annual wash-up), and the AED 250,000 actual use adjustment are unchanged.
A&M comment For financial institutions, insurers and residential landlords, exempt income is typically large in value but generates comparatively little input tax. Moving to a turnover ratio will push the recovery percentage down for those businesses, in some cases sharply. With this change, seeking a special apportionment method may become considerably more beneficial, and businesses should consider applying where appropriate. An input tax apportionment: special method application takes time to prepare and negotiate, and once approved, cannot be changed for two tax years. Businesses with material exempt activity should model both methods using FY2025-26 data now and determine their position during 2027, rather than waiting until the transition year. Businesses making ancillary exempt supplies (intercompany loans, trading in equity, etc.) are likely to be the most adversely affected and may incur additional costs because of this change. |
| When does this actually start? “The first tax year commencing after October 1, 2027” means January 1, 2028, for monthly filers, whose tax year is the calendar year, and February 1, March 1 or April 1, 2028, for quarterly filers, depending on the tax year end set under Article 55(1). |
| HIGH IMPACT |
2. Employee benefits: Redrafted
Article 53(1)(c)(1) and (2)
| Position to September 30, 2026 | Position from October 1, 2026 |
|---|---|
(1) Exception where it is a legal obligation to provide the goods or services under any applicable labor law in the State or Designated Zone. (2) Exception where it is a contractual obligation or documented policy to provide them, in order that the employee may perform their role, and it can be proven to be normal business practice in the course of employing those people. No specific treatment for accommodation. | (1) Exception where provision is mandatory under the applicable labor legislation in the State or any free zone, including financial and non-financial free zones but excluding accommodation provided by the employer, unless that accommodation is mandatory under decisions or directives issued by MoHRE. (2) Exception where it is a contractual obligation or documented policy, in accordance with the cases and conditions specified by the Authority. |
What this means in practice:
- “Designated Zone” is a VAT concept that did not align with the DIFC and ADGM employment regimes. “Any free zone, including financial and non-financial free zones” removes that mismatch.
- Accommodation is carved out of the labor law route and only qualifies where MoHRE mandates it.
- The self-assessed “perform their role/normal business practice” test appears to have been removed from the new Clause but probably be included in cases and conditions which are yet to be published by the FTA.
A&M comment This should not be viewed as a simple update. The key focus is accommodation-related costs. Construction, hospitality, manufacturing, and logistics businesses that currently recover VAT on labor accommodation, staff housing, and camp operating costs will need to retest each cost against MoHRE limits or directives, rather than relying on a general labor law obligation. Where no MoHRE mandate applies, the related input tax should be blocked. Read literally, from October 1, 2026, contractual or documented-policy benefits may not fall within an exception until the FTA specifies the relevant cases and conditions. We expect guidance before the effective date; however, if no guidance is issued, positions taken on contractual benefits from that date may create exposure and should be flagged internally. Businesses should re-run their blocked input tax analysis for employee costs before October 1, 2026. The existing position should not be assumed to continue, particularly as this is an area the FTA routinely audits. |
| HIGH IMPACT |
3. New block on input tax where consideration is settled in cash
Article 54(3) (new)
| Position to September 30, 2026 | Position from October 1, 2026 |
|---|---|
No restriction. Article 54 dealt only with the timing and payment conditions for recovery: the recoverable amount tracks the consideration paid in the period, and payment is treated as made where the taxable person intends to pay within six months of the agreed date. The method of settlement was irrelevant to recovery. | New Clause 3 denies input tax recovery on any supply with a value exceeding an amount to be specified by the Minister, where the consideration is paid, or intended to be paid, in cash, in accordance with the controls set out in that decision. |
What this means in practice:
- This is a new, standalone denial of recovery. It is not a timing rule, and it does not sit within the Article 53 blocked categories.
- The threshold and the controls sit in a Ministerial Decision that has not yet been issued.
A&M comment The provision is in force from October 1, 2026, and the Ministerial Decision may be released soon. The drafting refers to the value of “any supply”, not the invoice and not the payment. On a literal reading, part-settling a large supply in cash could taint recovery on the whole supply. That should be tested with the FTA once the Ministerial Decision is issued. Cash-intensive operations such as retail, food and beverage, small contractor and subcontractor payments, site petty cash, and cash on delivery should map now where cash settlement occurs above any announced threshold and start moving those flows to traceable channels. |
| HIGH IMPACT |
4. Anti-fragmentation rule for multi-component supplies
Article 4(6) (new)
| Position to September 30, 2026 | Position from October 1, 2026 |
|---|---|
Article 4(3) already described when a single composite supply exists, including where elements are so closely linked that it would be impossible or unnatural to split them. But Article 4(4) made single composite supply treatment conditional on two things: the components not being separately identified or charged, and all components coming from a single supplier. A supplier who separately priced each component therefore fell outside single composite supply treatment. | New Clause 6 prohibits a taxable person from treating a multi-component supply as multiple supplies where the nature of the supply and its economic substance show that the components are interconnected and cannot be separated. Where that is the case, the supply is deemed a single composite supply and follows the tax treatment of its principal component. |
What this means in practice:
- Economic substance should override form. Separate pricing, or the availability of separate pricing in the contract, is no longer decisive.
A&M comment One drafting point warrants attention. Clause 6 does not clearly say that the Clause 4 conditions no longer apply. This means the Regulation now has two tests: one based on the legal conditions and the other on the real commercial substance of the supply. This may affect areas such as bundled financial products (life insurance), real estate with related goods and services, education and healthcare packages, hospitality, telecoms and digital bundles. If a business charges separately for different parts of a package and applies different VAT treatments, it should now be able to show that those parts are genuinely separate in practice and not only shown separately on the invoice. Existing contracts and pricing schedules based only on Clause 4’s conditions may need to be reviewed. |
| MEDIUM IMPACT |
5. Capital asset definition updated
Article 57(1)
| Position to September 30, 2026 | Position from October 1, 2026 |
|---|---|
| “A Capital Asset is a single item of expenditure of the Business amounting to AED 5,000,000 or more excluding Tax, on which Tax is payable and which has estimated useful life equal or longer than …” | “… a Capital Asset is a business asset with a cost amounting to AED 5,000,000 or more, excluding Tax, on which Tax is payable and which has an estimated useful life equal or longer than …”, together with an express cross-reference to Articles 12 and 60 of the Decree-Law. |
The AED 5 million threshold, the ten-year and five-year useful lives, and the tax-payable condition are all unchanged. The one change of substance is “single item of expenditure” becoming “business asset”.
A&M comment The wording now focuses on what is recognized as an asset rather than on what was spent. On a plain reading, expenditure of AED 5 million or more that is expensed rather than capitalized falls outside the scheme, even where it has a long, useful life. That is a meaningful narrowing for large refurbishment, fit-out, and IT programmes where the accounting treatment is mixed between capital and revenue. Note also that Article 57(3), which aggregates staged payments, still refers to “a single item of expenditure” and has not been amended. Businesses maintaining a capital asset register should retest borderline items against the accounting treatment and keep the analysis on file. |
| MEDIUM IMPACT |
6. Healthcare zero-rating: Two goods’ categories consolidated into one
Article 41(4)
| Position to September 30, 2026 | Position from October 1, 2026 |
|---|---|
|
The separate “pharmaceutical products” and “medical equipment” sub-clauses are gone. |
This is a consolidation of two categories into one. The residual subclause for necessary goods supplied with zero-rated healthcare services already existed.
A&M comment This appears to be mainly a terminology update, consolidating medicines and medical equipment into the broader concept of “medical products”. In practice, the key test should still be whether the specific product is approved or registered with the relevant UAE health regulator and falls within the Cabinet Decision’s criteria. Businesses should not rely on a generic product list; they should retain SKU-level registration or import approval evidence to support zero-rating. |
| MEDIUM IMPACT |
7. Profit margin scheme: A condition added to the purchase price
Article 29(5)
| Position to September 30, 2026 | Position from October 1, 2026 |
|---|---|
The purchase price included, in addition to the price of the good, any costs and fees incurred to purchase the good. No condition attached to that inclusion. | Those costs and fees are included only where the input tax on them, if incurred, is not recoverable under Article 54 of the Decree-Law. The composition of the purchase price is otherwise unchanged. |
A&M comment The effect is to stop a double benefit. A dealer who recovers input tax on acquisition costs, transport, refurbishment, agent commission, auction fees etc., can no longer also add those costs to the purchase price to reduce the taxable margin. Where the input tax is blocked or otherwise not recoverable, the add-back to purchase price can still be acceptable. Second-hand goods dealers, particularly used-vehicles dealers, should split acquisition costs by recovery status in their stock records. A single “cost of purchase” line will no longer support the margin calculation on an FTA review. |
Effective Dates
| Provision | Effective |
|---|---|
| All amendments other than input tax apportionment | October 1, 2026 |
| Input tax apportionment — Article 55, Clauses 6, 7, and 19 | First tax year commencing after October 1, 2027 |
What Should Businesses Do Now?
| Area | Recommended action |
|---|---|
| Partial exemption | Model the outputs-based method against the current approach and quantify the recovery impact ahead of the 2027 transition. |
| Bundled supplies | Reassess mixed-rate and bundled offerings; identify the principal component and document the analysis. |
| Employee benefits | Review employment contracts and HR policies; ensure benefits intended for recovery are contractual or documented. |
| Cash payments | Review cash payment controls and monitor the forthcoming Ministerial Decision setting the threshold in line with implementing FTA decision 13 of 2026. |
How Can A&M Help
- Quantify the impact of the new apportionment methodology and support transition planning.
- Review bundled and mixed-rate supplies under the composite supply rule.
- Assess employee benefit arrangements and documentation for input tax recovery.
- Review cash payment mechanisms in line with implementing FTA decision 13 of 2026.
- Support engagement with the FTA in clarifications and rulings where required.
