UAE to Introduce Revised VAT Rules from January 2026
The United Arab Emirates is gearing up for the most extensive revision of its financial framework since the implementation of Value Added Tax (VAT) in 2018. A set of critical changes to the main VAT laws and the Tax Procedures Law will take effect on January 1, 2026.
These reforms, introduced via Federal Decree-Law No. 17 of 2025 (Tax Procedures) and Federal Decree-Law No. 16 of 2025 (VAT Law), signify the nation’s commitment to achieving world-class standards in financial governance. The dual goals are to simplify administrative processes for taxpayers while simultaneously strengthening the Federal Tax Authority's (FTA) ability to prevent financial misconduct. Businesses across the Emirates are now advised to begin preparing their systems for the new legal requirements.
Bringing Financial Certainty with Fixed Deadlines
The expiration of tax credit balances and refund claims is one of the most significant changes that resolves a long-standing source of uncertainty for businesses. Effective from 2026, a strict five-year statute of limitations will be imposeds. Taxpayers will have a maximum of five years to either request a refund for an excess credit balance or apply that credit against other outstanding tax liabilities. This definitive timeline removes financial ambiguity, allowing companies to handle their cash flow and financial forecasts with improved certainty. Once this period is over, the taxpayer can no longer claim the refund. According to the Ministry, this rule helps prevent old refund amounts from piling up, promotes clearer financial understanding, and fosters fair treatment for every taxpayer. It also aligns with international standards for refund procedures.
The new legislation includes necessary safeguards. For instance, if a claimable credit emerges unexpectedly late, such as after the five-year period has officially closed or during the final 90 days before the limit expires, businesses will still be granted an additional window to submit their refund application.
Simplifying Compliance
The amendments aim to lessen the daily administrative burden tied to tax compliance, allowing businesses to concentrate more on their core operations.
A major simplification involves the reverse charge mechanism. Under the updated VAT Law, taxable entities are no longer required by the amended VAT Law to issue a self-invoice. Instead, they should concentrate on keeping supporting documentation for every transaction, such as invoices or contracts. This change is expected to greatly reduce internal paperwork and streamline processes for companies.
Strengthening Governance Against Evasion
While simplification is important, the reforms also give the FTA increased power to protect public revenue and ensure full compliance across the economy.
A key measure has been added to directly combat tax evasion schemes. The FTA can now deny a business’s claim for input tax deduction if it finds that the supply was part of a tax-evasion scheme. This places a clear requirement on businesses to exercise stringent due diligence, demanding that they verify the integrity and legitimacy of their supply chain partners before claiming input VAT. This move strengthens the shared responsibility between the government and the private sector in maintaining a healthy financial ecosystem.
Additionally, the updated Tax Procedures Law provides the FTA with the official power to issue legally binding directions on the proper application and interpretation of tax legislation. This authority aims to minimize confusion, inconsistency, and potential disputes in different tax situations.
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Driving Innovation with R&D Credits
In a critical move to stimulate the national knowledge economy, the Ministry of Finance is also introducing a powerful Corporate Tax incentive: the Research and Development (R&D) Tax Credit.
Scheduled to start for tax periods beginning on or after January 1, 2026, this incentive offers an expenditure-based credit, providing a refundable tax credit ranging from 30 to 50 percent on eligible R&D costs. The refundable nature of the credit is especially attractive, as it may result in immediate cash flow for businesses investing in science, technology, and innovation in the UAE. The qualifying activities will align with the international standards mentioned in the Frascati Manual guideline to ensure the incentive fosters innovation, which is acknowledged globally.
Urgent Need for Business Preparation
The Ministry of Finance confirms that the primary goals of these reforms are to secure the long-term sustainability of public resources and increase transparency in the business environment. These collective changes represent a major step toward establishing a modern, fair, and globally competitive tax system.
For companies, the immediate steps involve reviewing the updated five-year deadlines, obtaining substantial tax incentives for R&D investment, and implementing strict due diligence processes to ensure full compliance by the 2026 deadline.
Mitesh Maithia
Tax Manager
Mitesh is a Tax Professional with expertise in direct, indirect, and international taxation, including transfer pricing, since 2018. Passionate about making complex tax matters simple, he shares insights to help businesses stay compliant and forward-looking.
