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FTA DECISION NO. 5 OF 2026
Updated VAT Rule for Deemed Supplies of Services
Deemed supplies of SERVICES only (not goods) | Issued 20 July 2026
1. Background and Purpose
Article 37 of the UAE VAT Law requires a Taxable Person to value a Deemed Supply by reference to its market value, but it does not itself prescribe how that value is to be determined where a reliable open market value for the exact service is not readily available. FTA Directive No. 5 of 2026 closes this gap specifically for Deemed Supplies of Services, by prescribing a cost-based mechanism that FTA officers and taxpayers must apply consistently.
The Directive applies only to services — for example, a business providing services free of charge, or for no consideration, in circumstances captured by the Deemed Supply provisions of the VAT Law and Executive Regulation. It does not alter the valuation treatment of deemed supplies of goods. Businesses that also handle VAT registration, filing, and compliance reviews should treat this as a distinct, services-only mechanism.
Key fact: The final figure produced by the four-step cascade — not the open market value itself — is the VAT-able value of the deemed supply.
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2. The Prescribed Valuation Mechanism
The Directive sets out a four-step cascade. Each step feeds into the next, and the final figure is the VAT-able value of the deemed supply.
Determine the Open Market Value
Identify the open market value of the services that constitute the deemed supply. If this cannot be determined, use the open market value of comparable services instead.
Strip Out the Profit Element
Divide the open market value (Step 1) by (1 + net profit margin) to arrive at the estimated total cost. The margin is taken from the prior year's financial statements, or the sector average if that isn't available.
Calculate the Input-Tax-Bearing Cost Ratio
From the previous financial year's accounts, calculate the percentage of total costs on which Input Tax was incurred — isolating the portion of costs that carried recoverable VAT.
Apply the Ratio to Get the Deemed Supply Value
Apply the Step 3 percentage to the Step 2 estimated total cost. Under Clause 3 of the Directive, this result is the value of the Deemed Supply of Services for Article 37 purposes.
3. Worked Example
Facts (illustrative): A UAE VAT-registered company provides certain services free of charge to a related entity in circumstances that constitute a Deemed Supply of Services. No reliable open market value exists for the exact services, so the value of comparable services in the market is used.
Determined at AED 500,000.
The company's financial statements for the preceding financial year show a net profit margin of 25% (0.25).
500,000 ÷ (1 + 0.25) = 500,000 ÷ 1.25 = AED 400,000.
From the same prior-year financial statements, costs on which Input Tax was incurred represent 60% of total costs.
Total cost on which Input Tax was incurred = 400,000 × 60% = AED 240,000.
240,000 × 5% = AED 12,000, self-accounted via output tax by the Taxable Person.
4. Practical Implications for Clients
- Financial statement dependency: the mechanism is built entirely on the preceding year's financial statements (net profit margin and input-tax-bearing cost ratio), making clean, timely year-end accounts essential to defensible deemed-supply valuations.
- New entities / no prior-year accounts: the Directive allows fallback to a sector-average net profit margin where the Taxable Person's own margin cannot be determined, but provides no equivalent fallback for the cost-ratio step — a practical gap worth flagging where a client has no preceding financial year.
- Documentation: clients should retain the open market value support (or comparable-service benchmarking), the net profit margin computation, and the input-tax cost-ratio computation as part of their VAT file, since each is now a discrete, auditable step.
- Interaction with related-party and free-of-charge arrangements: this Directive is most relevant to intra-group service arrangements, promotional services, and other no-consideration service supplies caught by the Deemed Supply provisions.
- Effective from issuance (20 July 2026): existing deemed-supply positions taken before this date should be reviewed against the prescribed mechanism going forward — talk to our tax advisory team if this affects your business.
Not Sure If This Decision Applies to You?
Speak with our expert team about your Qualifying Free Zone Person status, Qualifying Activity classification, and AUP readiness — before your next filing deadline.
