Executive summary

The United Arab Emirates (UAE) Federal Tax Authority (FTA), on 1 September 2026, issued Cabinet Decision No. 149 of 2026 (Decision) amending certain provisions of Cabinet Decision No. 52 of 2017 on the Executive Regulation of Federal Decree-Law No. 8 of 2017 on Value Added Tax (VAT Regulations). The amendments introduce several changes to the VAT Regulations that may result in practical changes for affected businesses, including those related to partial exemption apportionment calculations, input tax recovery on employee-related expenses, restricted input tax recovery for certain cash transactions and classification of composite supplies. The Decision is effective from 1 October 2026; however, the amendments relating to the input tax apportionment rules shall take effect from the first tax year beginning on or after 1 October 2027.

Detailed discussion

Composite supplies

The amendments provide additional clarification on identifying composite supplies and outlines the principle that economically inseparable elements should be treated as a single supply for VAT purposes. Businesses supplying bundled goods and services should consider reviewing their customer contracts along with marketing materials, pricing methodologies, invoicing arrangements and VAT determination processes to confirm that the VAT treatment adopted remains appropriate.

Employee benefits and input tax recovery

The Decision clarifies that input tax recovery on employee benefits should be deductible if the benefit is mandatory under applicable labor legislation in the UAE or any free zone, including financial and nonfinancial free zones. The amendments introduce a specific provision for employee accommodation, under which VAT recovery is restricted, unless the accommodation is required pursuant to a decision or directive by the Ministry of Human Resources and Emiratisation. Additionally, the input tax recovery on employee benefits may be deductible pursuant to a contractual obligation or documented policy, subject to conditions that may be specified by the FTA. As the FTA has not yet issued such conditions, the full scope of the amendment remains uncertain.

Cash-payment restrictions

The amendments introduce a new provision preventing recovery of input tax on supplies exceeding a threshold to be prescribed by the Ministry of Finance where consideration is paid (or intended to be paid) in cash. The detailed thresholds and controls will be set out separately in a Ministerial Decision that is awaited. Businesses should review payment processes and maintain appropriate supporting documentation once further guidance is issued.

Input tax apportionment and Capital Asset Scheme

The Decision introduces significant changes to the default input tax apportionment calculation, including a shift from the current input-tax-based methodology to an output-based method for determining input tax recovery ratios for taxpayers. For the purposes of this calculation, capital asset disposals and reverse-charge transactions shall be excluded. The changes are not applicable to government entities and charities.

The amendments in relation to the Capital Asset Scheme (while maintaining the threshold of 5 million UAE dirham (AED5m) for qualifying capital assets) appears to be clarifying in nature.

Tax computation for medical products

The Decision also revises the computation under the Profit Margin Scheme and zero-rating for "medical products" (yet to be defined, but replacing the terms "pharmaceutical products" and "medical equipment" in the VAT Regulations) among other things.

Implications

The amendments following from the Decision may require affected businesses to evaluate the potential impact of the changes on their VAT treatment, recovery positions, systems, processes and internal controls, and consider whether updates to contractual arrangements, accounting systems, documentation and compliance procedures are necessary. Early planning will be important for a smooth transition and to address any potential VAT issues arising from the amendments.