Cabinet Decision No. 149 of 2026 makes significant changes to the UAE VAT Executive Regulation. The Cabinet issued it on 1 September 2026, the Ministry of Finance announced it on 8 September 2026, and most of its provisions have applied since 1 October 2026.
The amendments do three things. They narrow input tax recovery on employee costs and on high-value cash purchases. They replace the standard method of input tax apportionment with a turnover-based method. And they require bundled supplies to be assessed by their economic substance rather than their contractual form. Other amendments address the Profit Margin Scheme, healthcare zero-rating, certain exempt supplies, capital assets and tax credit notes.
1. Employee costs - Article 53(1)(c)
Input tax on goods and services provided to employees free of charge is generally blocked. Article 53(1)(c) has allowed two exceptions, and the amendments tighten both.
The labour-law exception
Recovery remains available where the employer is legally obliged to provide the benefit. This exception now refers to labour legislation in the State and in any free zone, financial or non-financial. However, employer-provided accommodation no longer qualifies under this route unless a MOHRE decision or directive makes it mandatory.
The Documented policy exception
Previously, recovery was possible where the benefit was provided under an employment contract or documented policy in line with normal business practice. That general test is gone. Recovery now depends on the cases and conditions set out in FTA Decision No. 17 of 2026, which applies from 1 October 2026.
FTA Decision No. 17 of 2026 covers six categories:
- Transportation
- Food and Beverages
- Employee Accommodation
- Temporary accommodation for new employees, for up to 30 days
- Mobile phone, airtime, data and internet
- Parking
Each category carries its own conditions, and all of them must be met. Common themes are that the benefit must serve an operational need and must not be offered as an alternative to a cash allowance.
2. Cash payments - Article 54(3)
Input tax will not be recoverable where the consideration for a supply exceeds a threshold and is paid, or intended to be paid, in cash. The threshold and implementing controls will be prescribed by Ministerial Decision, which has not yet been published. Until then, businesses should review their cash-payment practices and consider adopting traceable payment methods for high-value transactions.
3. Composite supplies - Article 4(6)
Where a supply has several components that are commercially interconnected and cannot reasonably be separated, they are treated as a single composite supply. The whole supply takes the VAT treatment of its principal component. The new provision gives precedence to the nature and economic substance of commercially inseparable supplies, even where contractual terms or separate pricing might otherwise suggest multiple supplies.
4. Input tax apportionment - Article 55
This is the most significant structural change, and it applies from the first tax year beginning after 1 October 2027.
What changes: Businesses that make both taxable and exempt supplies must apportion residual input tax. Under the current standard method, the recovery rate is based on input tax. Under the new standard method, it is now based on value of supplies: the value of supplies permitting input tax recovery divided by the value of total supplies.
Two items are excluded from the new calculation:
- supplies of the business’s own capital assets
- receipts of Concerned Goods and Concerned Services under the reverse charge
Government entities and charities keep the input tax-based method under the new Article 55(19), given their significant non-business activities. This means that a business’s recoverable input VAT could change even where its expenses and underlying operations remain unchanged, simply because the recovery calculation will now depend on the value of its supplies. Businesses may also seek FTA approval for an alternative apportionment method where the standard method does not appropriately reflect actual use.
5. Clarificatory changes
| ARTICLE | KEY CHANGE |
|---|---|
| 29(5) Profit Margin Scheme | Acquisition costs can be added to the purchase price only where the input tax on them is not recoverable, pursuant to Article 54. |
| 41(4) Healthcare Zero-Rating | “Pharmaceutical products” and “medical equipment” are merged into a single category, “medical products”, to be specified by a Cabinet Decision. |
| 52(2) Input Tax Recovery in Respect of Exempt Supplies | A person is treated as being outside the State if present in the UAE for less than 30 days and that presence is not connected with the supply, replacing “less than a month”. |
| 57(1) Capital Assets | The definition now refers to a “business asset with a cost” of AED 5 million or more (excluding VAT), replacing “single item of expenditure”, subject to the applicable useful-life requirements. |
| 60(1)(a) Tax Credit Notes | The words “Tax Credit Note” must appear on the credit note itself, correcting the earlier reference to the invoice. |
Conclusion
The theme running through Cabinet Decision No. 149 of 2026 is substance over form. Input tax recovery now depends on why a benefit is provided, how a supply is paid for and what is actually being sold, not on how the contract or invoice is worded. Businesses that align their documentation with actual practices now and assess the financial impact of the forthcoming apportionment methodology before its implementation will be better positioned to manage their VAT compliance obligations.
