UAE VAT Law Amended: Critical Implications for Pending and Rejected Tax Refund Requests, and Other Amendments

Introduction

On 01 October 2025, the UAE issued Federal Decree-Law No. 16 of 2025, introducing targeted amendments to Federal Decree-Law No. 8 of 2017 on Value Added Tax. Although the new Decree-Law spans barely two pages, its impact is far from modest. The amendments directly address several long-standing practical challenges faced by both taxpayers and the Federal Tax Authority (“FTA”), particularly in the areas of refund processing.

This article provides a deeper examination of the newly introduced provisions and their real-world implications for businesses operating in the UAE. It also highlights strategic considerations for taxpayers with pending or rejected VAT refund claims, and provides a glimpse of the foreseeable future and implementation of the revised provisions.

Introduction of a New Article 54 (bis)

Federal Decree-Law No. 16 of 2025 introduces a new Article 54 (bis), distinct from the existing Article 54 on Recoverable Input Tax, which remains in full force. As published in the FTA’s unofficial translation, the newly inserted provision reads as follows:

1. “The Authority shall reject the deduction of the Recoverable Input Tax if it is established to the Authority that the supply subject to the deduction was part of a supply or a chain of supplies related to Tax Evasion, and the Taxable Person was aware of this relation upon deducting the Recoverable Input Tax.
2. The Authority may reject the deduction of the Recoverable Input Tax if it is established to the Authority that the supply subject to the deduction was part of a supply or a chain of supplies related to Tax Evasion, and the Taxable Person should, based on circumstances of the supply, have been aware of this relation.
3. For the purposes of applying the provisions of Clause 2 of this Article, the Taxable Person shall be considered to have been required to be aware that the supply was part of a supply or a chain of supplies related to Tax Evasion, if he did not verify the validity and integrity of the supplies he receives before deduction of Input Tax, in accordance with the measures, procedures and conditions determined by the Authority in this regard.”

The introduction of Article 54 (bis) appears to directly address a persistent challenge faced by taxpayers in the context of VAT refund requests that involve supply chains tainted (knowingly or unknowingly) by fraudulent activity. Such issues have historically arisen in cases mainly involving Missing Trader Fraud (MTF), a carousel-type VAT evasion scheme that has affected various sectors globally.

Industries such as mobile phone trading, scrap metal, textiles, oil & gas and other industries have been particularly vulnerable to MTF-related risks. In practice, a legitimate taxpayer may find itself somewhere within a supply chain in which one or more entities have engaged in fraudulent behavior. This has made the verification of Input Tax claims and the adjudication of refund requests especially contentious.

Before the introduction of Article 54 (bis), some VAT refund requests were delayed or got rejected outright, often accompanied by the issuance of a Tax Audit Notification. In many cases, taxpayers received rejection e-mails that included the following justification:

“Reason for Rejection:

Article 1 of Federal Decree-Law No. (8) of 2017 regarding Value Added Tax and its amendments, defines Recoverable Tax as “Amounts that have been paid and that the Authority may return to the Taxpayer pursuant to the provisions of this Decree-Law.” Based on this, the Authority is required to collect the tax related to the refund request.

Based on our review of your input tax and supply chain, we have not received the amount you are claiming as a refund. Therefore, your refund has been rejected and you have been issued with an audit notification. Once the audit is complete, you may request another refund if there is a balance remaining.”

This reasoning effectively implied that the FTA considered a taxpayer’s input tax to be non-recoverable unless the FTA could confirm that the supplier, or even a supplier several levels up, had paid the corresponding VAT to the FTA.

The FTA’s reliance on the statutory definition of Recoverable Tax has been the subject of increasing challenge in tax dispute resolution channels.

Taxpayers have consistently argued the following:

• The word “paid” in the definition of Recoverable Tax refers to the payment of VAT by the taxpayer to its supplier, as supported by the invoice-and-payment mechanism embedded throughout the VAT Law and its Executive Regulation.

• The law does not impose a requirement on taxpayers to investigate or guarantee their supplier’s subsequent remittance of the VAT to the FTA.
• Extending the term “paid” to cover the supplier’s own tax compliance introduces an extra-statutory condition, one not found in any provision governing input tax deductibility.

This interpretive dispute became increasingly visible in several refund cases where taxpayers maintained that their entitlement to recover input tax cannot be invalidated by failures or fraud occurring elsewhere in the supply chain due to the lack of a specific and explicit legal reference requiring the same, particularly when the taxpayer acted in good faith and fulfilled all statutory documentation requirements.

However, with the introduction of Article 54 (bis), this is no longer the case, as the legislator has inserted clear-cut and explicit provisions empowering the FTA to reject input VAT recovery claims (and hence any subsequent refund requests) in three instances:

• Where the taxpayer was actually aware that the supply for which input VAT was claimed formed part of a supply or chain of supplies connected to Tax Evasion (mandatory rejection).
• Where the taxpayer should have been aware – based on the circumstances of the transaction – that the supply was connected to Tax Evasion (discretionary rejection).
• Where the taxpayer failed to perform adequate verification and due diligence, as will be further defined by the FTA through prescribed measures, procedures, and conditions, thereby deeming the taxpayer to have been required to be aware of the connection to Tax Evasion (discretionary rejection). This is likely to be further elaborated on via an official decision to be issued by the FTA.

In effect, Article 54 (bis) settles the long-running controversy surrounding the denial of input VAT recovery on the basis of upstream non-compliance. The amendment now provides a clear and express legal basis for rejecting claims where the taxpayer was aware, should have been aware, or is deemed to have been aware due to insufficient verification of the supply. Going forward, taxpayers can expect the FTA to rely on these provisions when assessing refund requests, and businesses will need to align their internal controls and due-diligence procedures with whatever measures and conditions the FTA ultimately issues under this new Article.

Repellence of Article 79 (bis)

Federal Decree-Law No. 16 of 2025 repeals Article 79 (bis), which previously set out the statute of limitation rules applicable to tax audits, voluntary disclosures, and related actions. The removal of this provision does not abolish the statute of limitation; instead, it reflects a legislative shift toward consolidating limitation periods across all UAE tax laws. In practice, the relevant timelines will now be governed exclusively by the revised Article 46 of the Tax Procedures Law, which serves as the overarching procedural framework for VAT, Corporate Tax, Excise Tax, and any future federal taxes. This amendment therefore appears intended to harmonise the rules and eliminate inconsistencies, ensuring a unified approach to limitation periods across the tax regime.

Revisions to the Wording of Article 48(1) of the VAT Law

Article 48(1) of the VAT Law has also undergone a modest but meaningful revision, as set out below:

This amendment marks a practical step toward simplifying the compliance requirements associated with the reverse charge mechanism. In effect, taxpayers applying Article 48(1) are no longer required to issue a tax invoice to themselves, a step that, in practice, added little value but generated recurring administrative burden. The revision therefore aligns the law with existing commercial reality while providing clearer statutory backing for a more streamlined approach.

Revisions to the Wording of Article 74(3) of the VAT Law

Article 74(3) of the VAT Law has also undergone a significant change – as set out below:

This amendment effectively introduces a statutory time limit for utilising or reclaiming excess recoverable input tax. By capping the carry-forward period at five years from the end of the tax period in which the excess arose, the legislator has created a clear limitation framework that did not previously exist under the VAT Law. Any excess not refunded or used to settle VAT liabilities within this five-year window will automatically lapse, and the taxpayer’s right to claim or apply the amount will be extinguished. As a result, businesses should closely review their historical excess input tax balances (particularly older accumulated positions) and ensure that any unclaimed amounts are either offset or formally requested as refunds well before the limitation period expires, to avoid the permanent loss of such recoverable VAT.

Effective Date

The amendments introduced under Federal Decree-Law No. 16 of 2025 will take effect on 01 January 2026, providing taxpayers with a transitional period to assess the impact of the changes and adjust their internal processes, controls, and documentation practices accordingly.

Clarifications of the New Legislative Amendments

In the coming period, it is expected that the FTA will issue detailed Public Clarifications addressing the newly introduced legislative amendments, their scope, and their practical application. This has been the FTA’s established approach following substantive legal changes, and such guidance will be essential in interpreting the due-diligence requirements under Article 54 (bis), the operation of the revised statute of limitation for excess input tax, transitional provisions, and other procedural adjustments. These clarifications are likely to provide the technical detail necessary for businesses to adjust their compliance processes and ensure alignment with the amended VAT framework.

Conclusion

The amendments introduced by Federal Decree-Law No. 16 of 2025 represent one of the most substantive refinements to the UAE VAT framework since its inception, directly addressing long-standing areas of controversy. By expressly empowering the FTA to reject input VAT recovery in cases involving Tax Evasion risks, consolidating limitation periods under the Tax Procedures Law, simplifying reverse charge compliance, and imposing a defined timeframe for utilising excess recoverable tax, the legislator has clarified several grey areas that have shaped refund disputes and administrative practice over the past years. These changes collectively signal a shift toward a more structured and transparent VAT environment, but one that equally places greater responsibility on taxpayers to demonstrate robust compliance and due diligence.

As the effective date approaches, businesses should take proactive steps to assess the practical implications of each amendment, particularly in relation to supply-chain verification, historic refund positions, and internal accounting processes. Pending FTA Public Clarifications are expected to play an important role in shaping how these provisions are implemented in practice, and taxpayers would be well-advised to monitor these developments closely. Ultimately, the amendments present both opportunities to resolve legacy challenges and new compliance expectations that will require careful preparation ahead of 1 January 2026.

Seek Legal Counsel

Our expertise in tax law and regulations allows us to provide clients with effective and accurate tax advice, taking into consideration their unique circumstances and needs.

Our tax and financial crimes team, led by our Head of Tax and Financial Crimes, Mohamed El Baghdady, has successfully advised and represented clients across various industries, including, but not limited to, consumer goods and retail, services, real estate, oil & gas and banking and finance, before the Government authorities, tax tribunals and courts. Our clients have been successful in multiple tax disputes before the committees and courts.

For further information, please contact, Mohamed El Baghdady, Partner, Head of Tax and Financial Crimes, on mohamed.elbaghdady@habibalmulla.com.

Disclaimer

The content provided in this article is intended for informational purposes only and does not constitute legal advice. While every effort has been made to ensure the accuracy and completeness of this information, the article does not offer a guarantee or warranty regarding its content. The matters discussed in this article are subject to interpretation, and legal outcomes may vary based on specific facts and circumstances. We recommend that readers seek individual legal counsel before making any decisions based on the information provided. If you require specific legal advice, please contact us directly.