The Input Tax Apportionment Change That Does Not Start Until 2028

6 days ago

8 min read

Cabinet Decision No. 149 of 2026 took effect yesterday. Most of it. The provision with the largest financial consequence for partially exempt businesses, a rewrite of how residual input tax is apportioned, does not apply until the first tax year commencing after 1 October 2027.

That dual date is in the Decision itself. Article 3 says the Decision is effective from 1 October 2026, then adds that notwithstanding that, clauses 6 and 7 of Article 55, and new clause 19, come into effect from the first tax year commencing after 1 October 2027.

For a business on a calendar tax year, that means 1 January 2028. Not next year. The year after.

This is worth stating plainly because the practical consequence of getting it wrong runs in both directions. Model the change too early and you misstate your recovery position for two years. Treat it as distant and you lose the window in which something can still be done about it.

What did take effect on 1 October 2026

New Article 4(6), composite supplies. Where components are interconnected and cannot be separated, the supply must be treated as a single composite supply taxed by reference to its principal component
Article 29(5), Profit Margin Scheme. Costs and fees are added to the purchase price only where the input tax on them is not recoverable
Article 41(4), zero-rating. The separate limbs for pharmaceutical products and medical equipment are consolidated into any medical product as specified in a decision issued by the Cabinet
Article 52(2), zero-rated exported services. Outside the State now means present in the State for less than 30 days, replacing less than a month
Article 53(1)(c), employee expenses. The labour-law route is extended to any free zone but accommodation is carved out, and the contractual route is made conditional on cases and conditions set by the Authority
New Article 54(3), cash payments. Input tax may not be recovered above a threshold where consideration is paid in cash
Article 57(1), Capital Asset Scheme. A capital asset is now a business asset with a cost of AED 5 million or more, replacing a single item of expenditure
Article 60(1)(a). The words Tax Credit Note must appear on the credit note, not the invoice. A drafting correction

In force, but with nothing to apply. New Article 54(3) blocks input tax recovery on cash payments above a threshold specified in a decision issued by the Minister. That Ministerial Decision had not been published as at the date of writing. The provision is legally in force from 1 October 2026 and has no operative figure. Note also that one widely read alert identifies FTA Decision No. 13 of 2026 as the implementing instrument. It is not: Decision 13 concerns supplier verification before input tax deduction, which is a separate matter that also took effect on 1 October.

The amendment to Article 41(4) is worth a word, because it has been reported as the UAE adding a zero rate for medical goods. It does not. It consolidates two existing limbs into one and moves the product list into a separate Cabinet Decision. The scope has not been widened.

And new Article 4(6) is mandatory, not permissive. The wording is that a taxable person may not consider such a supply as multiple supplies. It is an anti-fragmentation rule, and it sits alongside the existing conditions in Article 4(4) rather than replacing them, which leaves two tests running in parallel.

The apportionment rewrite

Here is the change that matters, and why partially exempt businesses should start modelling it well before 2028.

Where input tax relates partly to supplies that permit recovery and partly to those that do not, the residual portion is apportioned. The method for calculating that portion is being replaced.

Until the switch, the basis is input-based: recoverable input tax over the sum of input tax for the tax period
From the first tax year after 1 October 2027, the basis is output-based: the value of supplies within Article 54(1) over the total value of all supplies
Rounding to the nearest whole number is unchanged

In other words, the ratio stops asking how much of your input tax is recoverable and starts asking how much of your turnover permits recovery. For a business whose exempt activity is large in value but consumes little input tax, those are very different questions.

What leaves the calculation

New Article 55(7)(b) excludes from the percentage the supply of capital assets attributable to the taxable person, and the receipt of concerned goods and concerned services under Article 48, which is to say reverse-charge receipts. Both previously sat inside the input tax pool on both sides of the old calculation.

One point of precision: the exclusion is of capital asset supplies, not capital expenditure. Input tax on capital assets continues to run through the Capital Asset Scheme in Articles 57 and 58. At least one published alert describes disposals and expenditure as leaving the ratio, which goes further than the text does.

A detail nobody appears to have flagged

The old numerator referred to recoverable tax by reference to Clause 1 of Article 54 and Article 57 of the Decree-Law. The new numerator refers to Article 54(1) only. Article 57 is the provision governing recovery of tax by government entities and charities.

That omission is consistent with those bodies being routed into a separate mechanism, which is exactly what new Article 55(19) does. But it is a substantive change to the operative wording, and we have not seen it noted in the major firm commentary published so far. Government entities and charities keep an input-based calculation under clause 19; everyone else moves to the output-based ratio.

Who is actually affected

This is where a good deal of commentary goes wrong, so it is worth being exact. Only four categories of supply are exempt under Article 46 of the VAT Law.

Financial services specified in the Executive Regulation
Residential buildings supplied by sale or lease, other than those that are zero-rated
Bare land
Local passenger transport

Healthcare and education are not exempt in the UAE. They are zero-rated. Zero-rated supplies carry full input tax recovery and sit in the numerator of the new ratio. A hospital or a school is not partially exempt by virtue of its core activity, and should not be modelling this change on that basis.

So the businesses that need to look at this are financial institutions, insurers to the extent they write exempt financial services, residential landlords and developers, holders of bare land, and local passenger transport operators.

There is a second group, less obvious and arguably more exposed: businesses whose exempt activity is incidental rather than central. Intercompany lending, dealing in equity, a residential unit let out alongside a commercial portfolio. These are not financial services businesses in any ordinary sense, but the same ratio applies to them.

Does recovery go up or down?

The Decision says nothing about outcome, and we would be cautious of anyone who states a general direction. It is entity-specific, and it turns on the relationship between the value of your exempt turnover and the input tax your exempt activity actually consumes.

That said, there is a reasoned view in the market worth repeating with attribution. Alvarez and Marsal expect that for financial institutions, insurers and residential landlords, where exempt income tends to be large in value but generates comparatively little input tax, moving to a turnover ratio will push the recovery percentage down, in some cases sharply. KPMG takes no position on direction and says only that the revised method should be modelled against the possibility of applying for a special method.

Both are sensible. The only way to know your own answer is to run both calculations on your own numbers.

The special method window

Cabinet Decision 149 does not touch the special apportionment provisions, which remain at Article 55(13) to (18). Where the standard calculation does not reflect the actual extent to which input tax relates to taxable supplies, a business may apply to the Authority for an alternative basis from the list of accepted mechanisms: outputs-based, transaction count, floorspace, or sectoral.

There is no statutory deadline to apply. Applications are open-ended, but the Authority's guidance requires at least six months of VAT registration and that the standard method does not give a fair and reasonable result
Approvals run for a period. The Authority's guide indicates approval is typically granted for four years for a non-sectoral method and two years for a sectoral one, and Article 55(15) separately prevents applying to change an approved mechanism for at least two tax years
The effect on existing approvals is unaddressed. Nothing in the Decision says what happens to a special method already approved under the old default. Approvals are granted by notification on their own terms, so an existing approval stands on those terms, but whether the Authority will revisit live approvals when the default changes is simply not dealt with

One practical note. The Authority's Input Tax Apportionment guide still carries its June 2023 edition and therefore describes the standard method as it stands today. It has not yet been updated for the amended Article 55, so it will be out of step for periods from the switch onwards.

What to do with the time

Establish whether you are partially exempt at all. If your only non-taxable supplies are zero-rated, this change does not reach you.
Run both calculations on last year's figures. Input-based and output-based, side by side. That single exercise tells you whether this is a material issue for your business or a non-event.
Check your incidental exempt activity. Intercompany loans and residential lettings sitting inside an otherwise fully taxable business are the most commonly missed exposure.
If the gap is material, consider a special method, and factor in the approval duration before you commit.
Do not change your current apportionment yet. The existing method governs until your first tax year commencing after 1 October 2027.

Common questions

When does the UAE input tax apportionment change take effect?

From the first tax year commencing after 1 October 2027. For a business on a calendar tax year that is 1 January 2028. The remainder of Cabinet Decision No. 149 of 2026 took effect on 1 October 2026.

What is changing in the apportionment calculation?

The residual input tax ratio moves from an input-based calculation, recoverable input tax over total input tax, to an output-based one, the value of supplies within Article 54(1) over the total value of all supplies.

What is excluded from the new calculation?

Supplies of capital assets attributable to the taxable person, and receipts of concerned goods and concerned services under Article 48, which are reverse-charge receipts. The exclusion applies to capital asset supplies, not to capital expenditure.

Are healthcare and education providers affected?

Not by virtue of their core activity. Healthcare and education are zero-rated in the UAE rather than exempt, and zero-rated supplies carry full input tax recovery. Only financial services, residential buildings, bare land and local passenger transport are exempt under Article 46.

Will the change reduce our input tax recovery?

That depends on your own figures. The Decision takes no position. Alvarez and Marsal expect a downward move for financial institutions, insurers and residential landlords, where exempt income is high in value but generates little input tax. The only reliable answer is to model both methods on your own numbers.

Do government entities and charities have to switch?

No. New Article 55(19) gives them a separate input-based calculation, so they remain outside the output-based ratio.

About the author

Bill Anderson, FCCA is a Partner at Gulf Tax Accounting Group and Managing Partner at Business Improvement Group. He was previously Global CFO, Head of Finance and MI Operations, at the Royal Bank of Scotland corporate banking division, where he led global operations spanning over 2 billion pounds in profits and 103 billion pounds in total assets. He brings 25 years of experience across finance, strategy, audit, corporate governance and compliance.

Sources: Cabinet Decision No. 149 of 2026 amending certain provisions of Cabinet Decision No. 52 of 2017 on the Executive Regulation of Federal Decree-Law No. 8 of 2017 on Value Added Tax, issued 1 September 2026; Federal Decree-Law No. 8 of 2017, Articles 46, 48, 54 and 57; the Federal Tax Authority consolidated Executive Regulation published 18 September 2025; and the Federal Tax Authority Input Tax Apportionment Guide of 16 June 2023. Commentary from Alvarez and Marsal and from KPMG is attributed in the text where relied on. This article sets out the position as at 2 October 2026 and is general information rather than advice on your circumstances.