Cabinet Decision No. 149 of 2026

Amendments to Cabinet Decision No. 52 of 2017 on the Executive Regulation of Federal Decree-Law No. 8 of 2017 on Value Added Tax. 

Issued 1 September 2026 (announced by the MoF on 8 September 2026).

Effective dates

A) Significant changes

Article 4(6) Single composite supply - economic substance test

Technical analysis

The existing rules primarily focus on the form of the transaction, including factors such as a single price, a single supplier, and the relationship between principal and ancillary elements. 

The addition of Clause 6 introduces an economic substance test, allowing the FTA to look beyond contractual arrangements and assess whether the components are commercially interconnected and inseparable in practice. Where this is the case, the supply must be treated as a single composite supply and follow the VAT treatment of its principal component.

This change is particularly relevant where different components of a transaction would otherwise attract different VAT treatments, such as standard-rated, zero-rated or exempt supplies. By introducing an explicit substance-over-form rule, the amendment limits the ability to separate elements of a commercially integrated transaction. Businesses offering bundled products or services should therefore review their arrangements and ensure that the commercial rationale for any separately treated supplies is clearly documented. 

Article 53(1)(c)(1) & (2) Blocked input tax on employee goods and services 

Technical analysis

1. “Designated Zone” is replaced by “any free zone, including financial and non-financial free zones.” This expressly brings any non-designated free zones within the legal obligation exception, resolving prior uncertainty over whether free zone labour rules could support recovery. This is a helpful widening of the exception provision. 

2. Employee accommodation is excluded from legal obligation exception unless the accommodation is mandatory under decisions/directives issued by the Ministry of Human Resources and Emiratization (MOHRE).

Note:

a. The practical impact will depend on whether input tax is incurred on the accommodation or associated goods and services. While the grant of a qualifying residential building may be exempt, VAT may arise under serviced or non-residential accommodation arrangements and on certain associated costs. Businesses should therefore assess the underlying contractual arrangements and each cost category separately rather than assume that all staff-accommodation expenditure follows the same VAT treatment. 

b. There is no change to the following areas:

• The amendment does not expressly address utilities, furniture, maintenance or other associated accommodation costs. Their treatment should continue to be assessed under the general input tax recovery and employee-benefit rules, taking account of the nature and use of each cost.
• established basis on which those associated costs and services are used to characterise the accommodation as residential or non-residential.
• The FTA’s prior guidance under Public Clarification on “Labour Accommodation: Residential versus Serviced Property” continue to apply as before.

3. Recovery under the contractual obligation or documented policy exception will now depend on the cases and conditions specified by the FTA. Businesses should therefore avoid relying solely on employment contracts or HR policies until the FTA issues the relevant decision and the conditions for recovery are clear.

Article 54(3) Input-tax block on high value cash supplies

Technical analysis

This amendment represents a further anti-tax evasion measure and complements the recently introduced supplier due diligence and procurement controls under FTA Decision No. 13 of 2026, which encourage electronic payments and restrict cash transactions to limited circumstances supported by appropriate documentation. Article 54(3) strengthens this framework by denying input tax recovery on qualifying high-value cash payments, thereby promoting the use of traceable banking channels and enhancing transaction transparency.

The change is expected to affect businesses that make or receive cash payments, subject to the conditions prescribed in the relevant decision. Importantly, both the monetary threshold and the detailed operational requirements will be specified in a forthcoming Ministerial Decision. While the scope of the provision remains subject to further clarification, businesses should proactively review and strengthen their payment controls, prioritise electronic settlement of significant transactions, and identify high-value cash purchases within their VAT review processes to assess compliance once the implementing rules are issued. 

Article 55(6) & (7) Standard input-tax apportionment method changes to an output - based method

Technical analysis

This amendment represents one of the most significant changes to the UAE VAT input tax recovery framework. Under the revised rules, the standard partial exemption method will move from an input tax-based approach to a turnover-based approach. This change brings the UAE more closely in line with the turnover-based recovery methodologies commonly adopted in mature VAT jurisdictions and is intended to provide a more consistent and transparent basis for input tax apportionment.

To ensure the recovery percentage reflects ongoing business activities, certain transactions will be excluded from the calculation, including:

• Disposals of the business's own capital assets; and 
• The receipt of Concerned Goods and Concerned Services accounted for under the reverse charge mechanism 

Note - The existing annual adjustment process will continue to apply, including the requirement to perform an actual-use adjustment where the difference exceeds AED 250,000. 

Impact on Businesses

The change is expected to have a significant impact on partially exempt businesses, particularly those operating in the banking, insurance, real estate, investment holding and mixed-use development sectors. Businesses will need to reassess their VAT recovery positions, as the recoverable percentage under a turnover-based methodology may differ considerably from the result achieved under the current input tax-based approach. 
 
Practical Actions for Businesses

• Perform parallel calculations: Model the turnover-based method alongside the current input tax-based method over at least a full tax year to quantify the potential cash flow impact.
• Enhance direct attribution processes: Review existing VAT allocation methodologies to maximise direct attribution of input tax to taxable and exempt activities. Reducing the residual input tax pool will minimise the impact of the new apportionment ratio. 
• Assess the suitability of an alternative recovery method: Businesses should evaluate whether a special apportionment method would produce a more representative recovery result and, where appropriate, begin preparing an application well in advance of the effective date. 

Consideration of alternative recovery methods

While the turnover-based approach will become the default method, Article 55 continues to permit taxable persons to apply to the FTA for approval to use an alternative input tax apportionment methodology. For businesses whose turnover profile does not accurately reflect how costs are incurred and consumed, a special method could potentially result in a more favorable recovery position. Accordingly, businesses should consider undertaking detailed modelling during the transition period to determine whether an alternative method may be beneficial and, if so, submit any application sufficiently early to secure FTA approval before the new rules become effective. 

Effective date and transition period

The new apportionment rules will apply from the first tax year commencing after 1 October 2027. For businesses that operate on a calendar-year basis, the revised methodology will first apply from 1 January 2028. Businesses with a non-calendar financial year will be required to adopt the new rules from their first tax year beginning after 1 October 2027.

Until that point, the existing input tax-based apportionment method will continue to apply. This provides affected businesses with a meaningful transition period to assess the financial implications, strengthen data quality, review recovery methodologies and, where appropriate, obtain approval for an alternative apportionment method before implementation. 

Article 55(19) Apportionment for Government Entities and Charities

Technical analysis

Unlike other taxable persons that will move to a turnover-based apportionment method, Government Entities and Charitable Organisations will continue to use an input tax-based methodology for apportioning residual input tax. This recognizes that these entities often undertake significant non-business or non-economic activities, meaning a turnover-based approach may not accurately reflect their actual use of costs. The retained input-based method is therefore intended to provide a fairer recovery outcome.

This provision will also take effect from the first tax year commencing after 1 October 2027, in line with the wider changes to the input tax apportionment rules. 

B) Clarificatory changes

Article 29(5) Profit Margin Scheme - composition of the “purchase price” 

Analysis

The change is intended to prevent a double benefit arising from both recovering input VAT and including the same costs within the margin calculation. While largely clarificatory in nature, the amendment will require dealers operating under the margin scheme, to maintain clear records of whether input VAT incurred on acquisition-related costs was recoverable.

Article 41(4) Zero-rating of healthcare goods - “medical product”

Analysis

The amendment consolidates the existing categories of pharmaceutical products and medical equipment into a single category, "medical products", which will be specified in a future Cabinet Decision. Apart from this consolidation, no substantive change has been made to the scope of qualifying supplies.  

Article 52(2) “Outside the State” test for exported financial services

Analysis

The amendment replaces the existing "less than a month" requirement with a clearer "less than 30 days" test. This provides greater certainty by removing ambiguity around the length of a calendar month, which can vary between 28 and 31 days.

Article 57(1) Definition of a Capital Asset

Analysis

The amendment revises the definition of a capital asset by replacing the reference to a "single item of expenditure" with a "business asset with a cost" of AED 5 million or more. It also introduces an explicit reference to the Capital Asset Scheme provisions under Articles 12 and 60 of the VAT Law. The amendment simply aligns the definition more closely with the underlying asset rather than the expenditure incurred to acquire it and confirms its application within the Capital Asset Scheme framework.

Article 60(1)(a) Tax Credit Note

What changed — and why it is clarificatory

The amendment replaces the word "invoice" with "credit note" to ensure the labelling requirement correctly refers to the document being issued. The existing content requirements under Article 60(1)(b) to (g) remain unchanged. 

What to expect next

The FTA is expected to issue further clarification and decisions to clarify the practical application of these changes. Businesses should continue to monitor developments and assess the impact of the amendments, as the full scope and application of several provisions will only become clear once the supporting guidance and decisions are issued. We will continue to monitor announcements from the FTA and provide further updates as additional guidance becomes available. 

How Grant Thornton UAE can help

Our Indirect Tax team can run a focused impact assessment across your recovery models, contracts, payment controls and ERP configuration, and prioritise the changes that affect your VAT position before the 1 October 2026 go-live (and the 2027 apportionment change). In particular, we can help with:

• Review input tax recovery methodologies: Reassess partial exemption and residual input tax recovery calculations under the new turnover-based methodology, compare the outcome with the current approach, and evaluate whether an alternative apportionment method may provide a more representative result. Where appropriate, businesses should consider engaging with the FTA early to obtain approval before the new rules take effect.
• Strengthen procurement and payment controls: Review and update procurement and payment policies to ensure appropriate controls are in place for cash transactions, supplier due diligence and supporting documentation, particularly in anticipation of the new restrictions relating to certain cash payments.
• Assess employee-related expenses: Review the VAT recovery treatment of employee benefits and staff accommodation, including the distinction between residential and non-residential accommodation. Businesses should also assess whether existing employment contracts and HR policies adequately support VAT recovery positions where costs are incurred as part of contractual employment obligations.
• Review VAT positions and supporting documentation: Revisit existing positions relating to bundled or composite supplies and ensure relevant VAT records remain up to date. Businesses should also review margin scheme documentation, Capital Asset Scheme records, tax credit note templates and evidence maintained to support the application of VAT rules for supplies made to recipients outside the UAE.