Restricting input VAT recovery on cash payments and clarify composite supplies, apportionment, healthcare & capital assets
The United Arab Emirates has amended its VAT Executive Regulation, with most changes taking effect from 1 October 2026.
Cabinet Decision No. 149 of 2026 introduces a broad package of technical changes covering input VAT recovery, composite supplies, partial exemption calculations, healthcare, employee accommodation and the Capital Assets Scheme. The Ministry of Finance says the reforms are intended to improve clarity, strengthen compliance and reduce the risk of tax evasion.
Perhaps the most significant new compliance measure is a restriction on input VAT recovery where purchases are paid in cash.
Large cash payments may lose input VAT deduction
A new Article 54(3) provides that input VAT may not be recovered where the value of a supply exceeds a threshold set by the Minister of Finance and the consideration is paid, or intended to be paid, in cash.
The important detail is that the threshold has not yet been specified. A separate Ministerial Decision will set both the amount and the associated controls.
This potentially makes the method of payment itself a condition for VAT recovery on higher-value expenditure. Businesses will therefore need to watch for the implementing decision and ensure their accounts payable and VAT-control processes can identify affected cash transactions.
Composite supplies: follow the economic substance
The UAE has also introduced an explicit rule for single composite supplies.
Where several components are interconnected and cannot realistically be separated based on the nature and economic substance of the transaction, taxpayers may not treat them as separate supplies. Instead, the transaction is treated as one composite supply and its VAT treatment follows the principal component.
This should provide a clearer statutory basis for determining the VAT treatment of bundled goods and services.
Input VAT apportionment reworked
The general method for allocating input VAT between recoverable and non-recoverable activities is also revised.
Taxpayers will calculate the proportion of qualifying supplies against total supplies, excluding specified items including capital asset disposals and certain reverse-charge transactions. The resulting percentage is rounded to the nearest whole number and applied to residual input VAT.
Government entities and charities receive a separate calculation based on the ratio of recoverable input VAT to total recoverable and non-recoverable input VAT.
These revised Article 55 apportionment provisions have a longer lead time. They apply from the first tax year commencing after 1 October 2027.
Other UAE VAT changes
The Decision also:
- revises the purchase price definition under the profit margin scheme to include certain purchase-related costs and fees where their input VAT is not recoverable;
- updates zero-rating for medical products and healthcare-related goods;
- provides that a person may be considered outside the UAE where they are present for fewer than 30 days and that presence is not effectively connected with the supply;
- clarifies input VAT treatment for employee accommodation, including where accommodation is required under Ministry of Human Resources and Emiratisation rules;
- confirms a AED 5 million VAT-exclusive threshold for assets within the Capital Assets Scheme; and
- updates requirements concerning tax credit notes.
Cabinet Decision No. 149 was issued on 1 September 2026. Most amendments apply from 1 October, giving businesses a relatively short period to review their VAT policies and controls.
The immediate item to watch is the forthcoming Ministerial Decision setting the cash-payment threshold. Until that is published, the practical reach of one of the most important new input VAT restrictions remains unknown.
