Directive 5 of 2026 sets out how VAT is calculated on services supplied for no consideration: unbilled intra-group services, employee benefits, private use of company resources. What used to be a matter of estimate is now a three-step formula.
What happened
Article 37 of the UAE VAT Law has provided for eight years that where a business uses resources on which it recovered input VAT for non-business purposes — services supplied without consideration, internal support functions, employee benefits — a deemed supply arises, meaning a transaction that must be subjected to VAT even though nobody paid anything. What was missing was the value on which to calculate it. Directive 5 of 2026, issued by the Federal Tax Authority (FTA) on 20 July 2026, now imposes a single three-step method.
What changes in practice
The method starts from the open market value of the service, removes the profit element using the previous year's net margin, and applies the percentage of the previous year's costs that actually carried recoverable input VAT. Both direct and indirect costs must be taken into account. The taxable value stops being an estimate defensible in discussion and becomes the output of a calculation: on audit the Authority no longer argues whether the value is reasonable, but whether the three figures are the right ones. And those figures sit in last year's financial statements.
Who it applies to
UAE companies registered for VAT that supply services for no consideration or for nominal consideration: groups with unbilled intra-group services, holding entities absorbing management, administrative or IT functions on behalf of other companies, businesses providing benefits in kind to employees. It also covers the shareholder who uses company resources privately.
The exposure
The risk has risen precisely because the method is now objective: the error is demonstrable on a spreadsheet. A business that has never declared deemed supplies, or has declared them on a value built by feel, holds a position that is quick to challenge, with recovery of the tax, penalties and interest.
What to do now
List every service the company supplies without invoicing. Pull the net margin and the proportion of costs that carried recoverable input VAT from the 2025 financial statements: those are the two figures the calculation needs. Then check whether the VAT returns already filed include deemed supplies, and on what value they were computed.
Sources
- https://tax.gov.ae/en/legislation/vat.aspx
- https://www.pwc.com/m1/en/services/tax/middle-east-tax-news-alerts/2026/new-fta-directives-clarifying-the-vat-treatment-of-selected-transactions-and-activities.html
Published 19 August 2026 on the basis of public sources and official United Arab Emirates instruments. This is not legal or tax advice. Verify your position with a qualified professional before acting.