UAE revises input tax apportionment rules for partially exempt businesses

The UAE Cabinet has issued Cabinet Decision No. 149 of 2026, amending the VAT Executive Regulations effective from 1 October 2026. The decision introduces a fundamental revision of the standard input tax apportionment methodology under Article 55, replacing the existing input-based method with an output-based recovery methodology. The new rules will apply from the first tax year beginning after 1 October 2027. The revised framework aligns the UAE more closely with partial exemption systems used in the UK, Europe, and other GCC jurisdictions including Saudi Arabia, Oman and Bahrain. The recoverable portion of residual input tax will now be calculated using the formula: (Taxable supplies ÷ Total supplies) × 100%, 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. 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. Businesses should undertake dry-run calculations using current data, review cost attribution methodologies, identify costs that may become residual under the new model, assess ERP system capabilities, and review any approved special methods with the FTA.