Introduction
The UAE continues to refine its tax framework to align with international best practices and enhance compliance. On 1 October 2025, Federal Decree-Law No. 16 of 2025 was issued, introducing significant amendments to Federal Decree-Law No. 8 of 2017 on Value Added Tax (VAT). These changes take effect from 1 January 2026, marking another step in the evolution of the UAE’s VAT regime.
Legislative Context
Since its inception on 1 January 2018, the UAE VAT Law has undergone several amendments:
- Federal Decree-Law No. 18 of 2022 (effective 1 January 2023)
- Federal Decree-Law No. 16 of 2024 (effective 30 October 2024)
- Federal Decree-Law No. 16 of 2025 (effective 1 January 2026)
Each amendment progressively modernizes the VAT system, addressing evolving business realities and digital transformation. The 2025 Decree primarily focuses on tightening anti-evasion controls, clarifying reverse charge mechanisms, and reinforcing input tax deduction compliance.
Core Amendments under Federal Decree-Law No. 16 of 2025
Reverse Charge Mechanism – Article 48 Updated
A notable revision appears in Article 48, which governs the Reverse Charge Mechanism (RCM) for imported goods and services.
“Clause 1 now explicitly requires a taxable person importing concerned goods or services for business purposes to account for the due tax and related obligations while being exempt from issuing a tax invoice to self”.
Introduction of Article 54 (bis): Rejection of Input Tax Deduction
A completely new article — Article 54 (bis) — has been added, targeting tax evasion.
The Federal Tax Authority (FTA) now has the power to reject input tax recovery if:
- The transaction is part of a supply or a chain of supplies involving tax evasion, and the taxpayer was aware of the connection; or
- The taxpayer should have known, based on the circumstances, but failed to exercise due diligence.
To determine “should have known,” the FTA will assess whether the taxpayer verified the validity and integrity of the supplies he receives before claiming input tax.
This amendment effectively introduces a “know-your-supplier” compliance duty, obligating businesses to adopt stronger vendor verification and documentation controls.
Strict Timelines for Excess Recoverable Tax (Article 74)
The amendment introduces a definitive statute of limitations on claiming excess tax credits through an amendment to Article 74.
If a Taxable Person has excess Recoverable Tax (where input tax exceeds output tax) after offsetting and does not submit a request to recover it, the excess is carried forward to subsequent Tax Periods. However, the new law imposes a strict limit: the excess can only be carried forward for 5 years from the end of the Tax Period in which the excess arose.
Crucially, if a request to recover the excess is not submitted, or if the excess is not used to settle tax liabilities before this 5-year period expires, the right to claim such excess shall lapse. Once lapsed, it cannot be used to settle any future Tax liabilities.
Cancellation of Article 79 (bis) – Statute of Limitation
Federal Decree-Law No. 16 of 2025 also cancels Article 79 (bis). This suggests that provisions regarding the Statute of Limitations will now be governed primarily by the Tax Procedures Law, removing specific limitation clauses previously housed within the VAT Decree-Law.
Conclusion
The amendments introduced by Federal Decree-Law No. 16 of 2025 signal a paradigm shift in the UAE’s VAT landscape. We are moving beyond the initial phase of implementation into an era of enforced integrity and heightened diligence.
Waiting until 1 January 2026 effective date to address these changes is a risk no business should take. Now is the time to audit your vendor relationships and recover aging tax credits before your rights legally lapse.
