Cabinet Decision No. 149 of 2026: Fundamental Changes to Input Tax Apportionment Rules, in addition other updates to key VAT rules
Executive summary
The UAE Cabinet has issued Cabinet Decision No. 149 of 2026 amending various provisions of the VAT Executive Regulations, effective from 1 October 2026. Whilst the Decision introduces a number of changes across the VAT framework, the most significant development is the complete revision of the standard input tax apportionment methodology under Article 55. For those partially exempt businesses that are impacted, it is important to note that these revised rules will apply from the first tax year beginning after 1 October 2027.
The amendments move the UAE closer towards a more internationally recognised partial exemption model by placing greater emphasis on actual taxable supplies and direct attribution principles. Taxpayers with large exempt income streams, holding structures, real estate groups, financial institutions and diversified businesses should begin evaluating the impact now, as recovery outcomes may differ materially from those achieved under existing methods.
Gateley viewpoint
In our view, the changes represent a deliberate shift towards a more commercially realistic input tax recovery framework. Whilst the revised methodology should improve consistency and reduce recovery distortions throughout the year, it also removes a cash flow advantage that some businesses have historically enjoyed under the existing inputs-based method.
For many taxpayers, the headline impact will not necessarily be a reduction in annual VAT recovery, but rather the timing of that recovery. Businesses that have traditionally recovered all input tax during the year and accounted for adjustments at year-end may now need to fund irrecoverable VAT throughout the tax year. This could have a material working capital impact, particularly for banks, real estate companies and diversified groups with significant exempt activities.
The headline change: Article 55 Input Tax Apportionment
What has changed?
In summary, the revised Article 55 replaces the existing input-based standard apportionment method with an output-based recovery methodology. This aligns the UAE more closely with the approach adopted in other Gulf Cooperation Council (GCC) jurisdictions, including Saudi Arabia, Oman and Bahrain, and reflects principles commonly seen in more established VAT systems.
In our view, the change is intended to address situations where the current input-based methodology could produce recovery percentages that were not always representative of a taxpayer’s underlying economic activities, resulting in materially different outcomes for businesses operating similar models.
Whilst the methodology used to calculate the recoverable portion of residual input tax has fundamentally changed, the requirement to directly attribute input tax to taxable and exempt activities remains unchanged. As such, the real impact of the amendments will be felt in relation to residual overhead costs and the percentage of those costs that taxpayers are ultimately entitled to recover.
The new rules provide that the recoverable portion should be calculated using a percentage derived from:
(Taxable supplies ÷ Total supplies) x 100%
(note: the formula is oversimplified, as Taxable supplies under the law can be more than just those supplies on which UAE VAT applies)
with certain adjustments and exclusions. Capital asset disposals and reverse charge transactions are excluded from the calculation. The resulting percentage is rounded to the nearest whole number and applied to residual input tax.
A move towards international partial exemption principles
The revised framework bears a closer resemblance to partial exemption systems commonly used in the UK, Europe and other parts of the GCC and signals a move towards a more formula-driven recovery regime.
From a practical perspective, however, we expect one unintended consequence of the changes to be an increase in applications for Special Input Tax Apportionment Methods.
For many taxpayers, the new output-based standard method may no longer produce the most favourable or commercially representative result when compared with the current input-based approach.
In our view, businesses should use this change as an opportunity to undertake a broader review of their VAT recovery methodology. The objective should not merely be compliance with the new rules but ensuring that the chosen recovery method accurately reflects the economic use of costs and maximises legitimate VAT recovery. Taxpayers that proactively reassess their methodology may be able to unlock significant recovery opportunities that outweigh the impact of the legislative changes themselves.
New questions arising from the changes
Impact on actual use
One of the key questions arising from these amendments is how the revised standard method of apportionment will interact with taxpayers’ obligations under the actual use rules.
Under Article 55(11) of the Executive Regulations, taxpayers are required to compare the recovery percentage determined under the standard method, following the annual wash-up calculation, with the actual use of the goods and services acquired during the year. Where the difference in recoverable input tax exceeds AED 250,000, further adjustments are required as part of the annual adjustment process.
Historically, the Federal Tax Authority (FTA) has indicated in its guidance that an output-based methodology may be an acceptable approach for determining actual use in certain circumstances. This raises an important question under the revised Article 55: if the standard method itself is now based on an output-driven calculation, does this mean that the standard method will, by default, satisfy the actual use requirement? If so, would taxpayers still be required to undertake a separate actual use exercise as a benchmarking tool?
In our view, this is unlikely to be the intended outcome, although additional clarification from the FTA would be welcome. The purpose of the actual use provisions is to serve as a safeguard against recovery results that do not adequately reflect the economic use of costs. If the standard method and the actual use methodology were effectively identical, the practical relevance of the Article 55(11) comparison exercise could be significantly reduced.
It is therefore possible that the FTA may revisit its approach to actual use and provide greater flexibility regarding the methodologies that taxpayers can adopt. The methods currently recognised in the Input Tax Apportionment Guide are relatively prescriptive and, in a lot of cases, may not produce outcomes that accurately reflect the economic use of costs across all sectors.
Impact on approved special methods
Another question that arises is how these new rules will impact special methods which were approved already by the FTA, particularly those that were agreed based on outputs. While we consider that such approvals should, in principle, remain valid for the period for which the FTA originally granted approval (being four years for a non-sectoral method), it could be argued that taxpayers may need to revisit these arrangements with the FTA now that the outputs method has become the standard method.
More importantly, those taxpayers may now also need to perform a separate actual use calculation based on a similar rationale outlined in the previous point.
What should businesses do now?
Although the Article 55 changes do not become effective until the first tax year commencing after 1 October 2027, taxpayers should not wait until then to assess their position.
We recommend:
- Performing a dry-run calculation using 2025 and 2026 data.
- Reviewing current cost attribution methodologies.
- Identifying costs that may become residual under the new model.
- Assessing whether ERP systems can support enhanced attribution requirements.
- Reviewing any approved special methods with the FTA.
- Modelling the expected impact on VAT recovery percentages and cash flow.