Introduction
Cabinet Decision No. (149) of 2026 introduces significant amendments to the UAE VAT input tax apportionment framework under Article (55) of the VAT Executive Regulation.
The amendments represent a fundamental change in the methodology for determining the recoverable portion of residual input tax. For taxable persons generally, the current input-based methodology will be replaced by an approach based on the value of supplies.
At the same time, new Clause (19) of Article (55) introduces a separate mechanism specifically for Government Entities and Charities, under which the recoverable percentage will continue to be determined on an input-based basis.
These changes may materially affect taxable persons with mixed supplies and shared costs and warrant early assessment.
1. Key Changes under Article (55)
General methodology
Under the current methodology, the recoverable percentage is based on the proportion of recoverable input tax to the total recoverable and irrecoverable input tax incurred during the relevant Tax Period.
Under amended Clauses (6) and (7), the general methodology will move to a value-of-supplies-based approach. The recoverable percentage will generally be determined by reference to the value of relevant supplies as a proportion of the total value of all supplies, subject to the prescribed exclusions and requirements.
This change may produce materially different recovery outcomes where a taxable person’s supply profile differs from its input tax and cost profile.
Government Entities and Charities – new Clause (19)
A key development is the introduction of Clause (19), which establishes a standalone mechanism for Government Entities and Charities.
Unlike the amended general methodology, Clause (19) uses an input-based approach, with the recoverable percentage determined by reference to the proportion of directly recoverable input tax to the total directly recoverable and directly irrecoverable input tax for the relevant Tax Period. The resulting percentage is then applied to the relevant residual input tax, subject to the requirements of the amended provision.
Accordingly, Government Entities and Charities should assess their position specifically under new Clause (19) rather than applying the general value-of-supplies-based methodology.
2. When will the amendments apply?
The amendments to Clauses (6) and (7), together with new Clause (19), will apply from the first Tax Year commencing after 1 October 2027.
Accordingly, the Article (55) amendments do not apply from 1 October 2026.
For taxable persons following a calendar-year Tax Year, the amended rules will generally apply from 1 January 2028.
Until the relevant implementation date, the existing methodology will continue to apply, providing a transition period to assess the impact and prepare systems, processes and documentation.
3. Why does this matter?
The amendments may directly affect the amount of recoverable input tax, particularly for businesses with:
- mixed taxable and exempt supplies;
- significant shared or common costs;
- substantial residual input tax; or
- materially different supply and cost profiles.
Affected taxpayers should consider:
- modelling the current and amended methodologies using historical data;
- reviewing direct attribution of input tax;
- assessing the treatment of relevant exclusions;
- reviewing accounting and ERP data requirements;
- updating VAT policies, controls and supporting documentation; and
- considering whether an alternative apportionment method may be appropriate, where available.
Government Entities and Charities should undertake a separate assessment of the requirements and practical application of Clause (19).
4. What should taxable persons do now?
We recommend that affected taxpayers:
1. Assess the financial impact
Model the amended methodology against historical and forecast data.
2. Review direct attribution
Identify opportunities to improve the direct attribution of input tax and reduce residual input tax.
3. Review systems and data
Ensure that accounting and ERP systems can support the required calculations and audit trail.
4. Review the apportionment methodology
Consider whether the prescribed methodology appropriately reflects the business and whether an alternative methodology should be explored with the Federal Tax Authority.
5. Prepare for implementation
Update VAT procedures, controls and working papers before the relevant Tax Year.
5. How can AZ Advisory assist?
AZ Advisory’s VAT team can assist with:
- assessing the impact of the amended Article (55);
- modelling current versus amended recovery percentages;
- reviewing direct attribution and residual input tax;
- assessing alternative apportionment methods;
- reviewing systems, data and VAT controls; and
- assisting Government Entities and Charities with the application of new Clause (19).
Talk to us
The amendments to Article (55) represent a significant development in the UAE VAT input tax recovery framework.
An early assessment can help identify the potential financial impact and ensure that appropriate systems, processes and documentation are in place before the amended rules apply.
Contact AZ Advisory to discuss how the amended Article (55) may affect your organisation and its input tax recovery position.
Disclaimer
This Tax Alert has been prepared for general information purposes only and does not constitute tax or legal advice. The application and impact of the amendments should be assessed based on the specific facts and circumstances of each taxable person and with reference to the applicable UAE legislation, Cabinet Decisions, Executive Regulations and relevant guidance issued by the Federal Tax Authority.
