Dear Sir/Madam,
You are receiving this update as we have previously been in contact in relation to UAE VAT. The revised input tax apportionment provisions introduced by Cabinet Decision No. 149 of 2026 fall most heavily on businesses that make both taxable and exempt supplies, which in practice means the financial services and real estate sectors above all others. Please find below our analysis of the changes and what they are likely to mean for your recovery position.
Executive Summary
By way of a Federal Cabinet Decision (Cabinet Decision No. 149 of 2026, issued on 1 September 2026), the UAE has amended the VAT Executive Regulations.
Some of the amended provisions govern how partly exempt businesses calculate recoverable input tax. These same provisions apply from the first Tax Year commencing after 1 October 2027.
Financial services and real estate are the businesses for which this matters most, because they are the ones that carry a permanent residual input tax pool. A bank earning margin-based income alongside explicit fees, an insurer writing both general and life business, a fund manager brought within the exemption by Cabinet Decision No. 100 of 2024, a landlord holding commercial and residential stock, and a financing company or holding structure with exempt income are all making a mix of supplies that Article 55 exists to address.
The general apportionment ratio for overhead will be expressed by reference to the value of supplies. The previous general method for overheads referred to an input tax ratio.
The practical consequence is that a recovery percentage which has been stable for years can move without any change in the underlying business. The effect is invisible until the calculation is rerun. The delayed effective date is specific to the taxable person, so a calendar Tax Year is first affected in the year beginning 1 January 2028 and a 31 March year end in the year beginning 1 April 2028.
Revised Input VAT Recovery Framework
Attribution Before Apportionment stays the same
Input VAT attributable to taxable supplies (taxable and zero rated) and supplies made outside of the UAE which would have been taxable in the UAE is recoverable in full.
Input VAT blocked under Article 53 of the Executive Regulation, or attributable to other (non taxable) supplies, is not recoverable.
Input tax relating partly to both categories is residual and is apportioned.
Calculation Residual input VAT recovery
- Current ratio is input tax ratio
The current wording apportions based on an input tax ratio: deductible input tax over total input tax. This is an approach uncommon in VAT systems globally and is distortive.
- New ratio applicable as from 1 October 2027 based on turnover
The recovery percentage is the value of supplies specified in Clause 1 of Article 54 of the Decree-Law over the total value of all supplies. This is a change of basis rather than a refinement, and moving to a turnover based measure expressed by reference to the value of supplies brings the UAE into line with more common practice.
- What’s the difference?
For many partly exempt businesses the two measures do not produce similar percentages.
Example: A bank provides financial services only. In a single Tax Year it earns taxable fee income of AED 40,000,000 and exempt interest margin of AED 60,000,000. Its lending book carries heavy directly attributable costs while its fee income is generated with comparatively little, so its input tax for the year is AED 300,000 directly attributable to taxable supplies, AED 900,000 directly attributable to exempt supplies, and AED 500,000 residual.
Under the current input tax ratio, the recovery percentage is AED 300,000 over AED 1,200,000, or 25%, and AED 125,000 of the residual pool is recovered.
Under the revised turnover ratio, it is AED 40,000,000 over AED 100,000,000, or 40%, and AED 200,000 is recovered.
On these figures the change of basis improves recovery by AED 75,000 in the year, an increase of 60% on the amount currently recovered from the residual pool, with no change in the underlying business. The movement can run the other way for a business whose directly attributable costs sit mainly on the taxable side, so the direction and size turn on the mix of the individual business and cannot be inferred from the change itself.
| Measure | Current – input tax ratio | Revised – turnover ratio |
|---|---|---|
| Basis | Deductible input tax over total input tax | Value of supplies allowing recovery over total value of all supplies |
| Numerator | AED 300,000 | AED 40,000,000 |
| Denominator | AED 1,200,000 | AED 100,000,000 |
| Recovery percentage | 25% | 40% |
| Residual input tax | AED 500,000 | AED 500,000 |
| Residual input tax recovered | AED 125,000 | AED 200,000 |
Current – input tax ratio 25% | AED 125,000
Revised – turnover ratio 40% | AED 200,000
Recovery percentage applied to the AED 500,000 residual pool
- Special methods and Specified Recovery Percentage continue to apply
Only the general method changes. The Decision does not amend the framework under which a taxable person applies for a special apportionment method, including the sectoral method, and a fixed recovery percentage specified by the FTA remains available as a method.
Two Exclusions
- Supplies of Capital Assets
Supplies of Capital Assets attributable to the taxable person come out of the calculation. For a real estate operator this prevents a disposal from distorting the percentage in the period in which it falls. The exclusion has no equivalent under the current input tax ratio, which does not take the value of supplies into account. It is needed because the revised ratio does.
- Receipts of Concerned Goods and Concerned Services
Receipts under Article 48 of the Decree-Law are also excluded. Under the reverse charge mechanism, the recipient accounts for VAT as though it had made the supply itself. Without this exclusion, the value of imported goods and services would enter both the numerator and the denominator of the ratio and, for a partly exempt business, raise the recovery percentage without any change in how its costs are used. The exclusion keeps the percentage tied to the supplies the business makes to its customers, and its effect is greatest where imported services are high relative to turnover, as is common in financial services.
Application
- From the first Tax Year commencing after 1 October 2027
Clauses 6, 7 and the new Clause 19 of Article 55 apply. The first affected Tax Year should be identified for each entity and each Tax Group individually, as it turns on the relevant Tax Year end rather than on a common date.
- Guidance still outstanding
As at the date of this document, no FTA public clarification or updated version of VATGIT1 addressing the revised Article 55 wording has been published. Whether the FTA adopts a position comparable to VATP040 in respect of the revised wording remains to be seen, and the point should be monitored.
Sector Impact
Financial Services
Article 42 of the Executive Regulation exempts financial services supplied for an implicit margin while taxing those supplied for an explicit fee, commission, discount or rebate. A bank therefore generates exempt interest margin alongside taxable fee income in the same cost base, and an insurer writing both general and life business does the same. Cabinet Decision No. 100 of 2024 extended the exemption to the management of investment funds and to the transfer and conversion of virtual assets, which brought fund managers and virtual asset businesses into partial exemption, in some cases for the first time.
Zero-rated exports of financial services to recipients outside the State remain within the recoverable numerator, so the revised wording does not disturb the value of building the evidence to support export treatment. Institutions running distinct business lines through a single standard percentage should read the revised standard method together with the FTA position on sectoral methods, since the case for a sectoral approach is strengthened where the standard result no longer reflects the use of the inputs.
Real Estate
Real estate operators make supplies across the full spectrum. Commercial property is taxable at the standard rate, the first supply of a residential building within three years of completion is zero-rated, subsequent supplies of residential property are exempt, and bare land is exempt. A landlord holding a mixed portfolio, a developer with unsold residential stock beyond the three year window, and an owners association servicing mixed-use towers all carry a residual pool that the revised calculation will reach.
Aurifer's Recommended Actions
- Identify your first affected Tax Year: Determine the first Tax Year commencing after 1 October 2027 for each registered entity and each Tax Group.
- Run a parallel calculation during 2027: Recalculate a recent full year under both the current and the revised wording, so that the direction and size of the movement are known before the first affected return rather than discovered in it.
- Revisit any FTA-approved special method or Specified Recovery Percentage: Review the basis on which the approval was granted against the revised standard method, and assess whether a sectoral method now produces a fairer result for an institution running several distinct business lines.
- Review the attribution layer: Test how much input tax is being treated as residual that could be directly attributed to taxable or exempt activity, since reducing the residual pool reduces sensitivity to the percentage itself.
- Update systems, tax codes and documentation: Confirm that the core system or tax engine can isolate Capital Asset supplies and Article 48 receipts from the value of supplies, and update the VAT manual, apportionment methodology paper and internal controls to reflect the revised method and its effective date.
How Aurifer Can Help
- Impact modelling for your first affected Tax Year: We can rerun a recent full year under both the current and the revised Article 55 wording, isolate the effect of each exclusion, and set out the drivers behind the movement in your recovery percentage while there is still time to act on it.
- Sectoral method and Specified Recovery Percentage support: We can assess whether an existing approval remains appropriate under the revised standard method, and prepare or amend an application to the FTA where a sectoral method better reflects the use of inputs across distinct banking, insurance, funds or real estate books.
- Attribution and residual pool review: We can review how input tax is currently split between directly attributable and residual, identify cost categories that can be attributed with better support, and reduce the pool exposed to the apportionment percentage.
- Systems and data readiness: We can specify the tax codes, reports and data fields needed to isolate Capital Asset supplies and Article 48 receipts from the value of supplies, and work with your finance and technology teams to implement them ahead of the first affected Tax Year.
- Documentation and training: We can update your VAT manual and apportionment methodology paper to the revised wording, and train finance and tax personnel on the two-stage structure and the evidence needed to support direct attribution.
For support with any of the above, please reach out to your contact at Aurifer or reach out to us at Aurifer Tax & Audit.
This document provides general guidance based on Cabinet Decision No. 149 of 2026 and reflects the applicable law and guidance as at the date of this document. It does not constitute legal or tax advice and should not be relied upon as a substitute for specific professional advice. Changes to the law, regulations, or FTA practice subsequent to this date are not reflected.