UAE Amends Executive Regulations of Value Added Tax with Changes Affecting Input Tax Treatment and Supply Classification

The United Arab Emirates has issued substantial amendments to the Executive Regulations of the Value Added Tax (VAT) Law, addressing the treatment of input tax and the reclassification of certain types of supplies, which creates new obligations for companies registered in the VAT system.

The amendments include clarifications on how recoverable input tax is calculated in mixed activities—those combining taxable and exempt supplies—affecting the mechanism for calculating the annual recovery percentage.

The amendments also cover a review of the classification of certain supplies, where a specific tax treatment may shift from exemption to zero-rating or vice versa, requiring companies to reassess their ongoing contracts and transactions.

Tax experts recommend that companies operating in the UAE urgently review their tax accounting systems and update supply classifications, especially those active in the real estate, financial services, healthcare, and education sectors, which typically involve a mix of taxable and exempt supplies.

What do these terms mean?

Input Tax: The Value Added Tax paid by a company when purchasing goods and services necessary for its business, which it has the right to recover if those purchases are linked to taxable supplies.

Taxable Supplies: Sales and services to which VAT applies at a rate of 5%, as opposed to exempt supplies, which are not subject to tax and do not allow for the recovery of input tax.

Recovery Percentage: The percentage of input tax that companies with mixed activities are entitled to recover, calculated according to a formula that takes into account the volume of taxable supplies relative to the total.