Know Your Supplier: The FTA Prescribes the Verification Standard Behind Article 54 bis of the VAT Law

Introduction

In our earlier article on Federal Decree-Law No. 16 of 2025, we examined the introduction of Article 54 bis into Federal Decree-Law No. 8 of 2017 on Value Added Tax, and its amendments (the “VAT Law”), and observed that its second and third limbs – which deem a Taxable Person to have been required to be aware of a connection to Tax Evasion where he has not verified the validity and integrity of the supplies he receives – awaited elaboration by the Federal Tax Authority (“FTA”).

That instrument has now been issued. On 22 July 2026, the Chairman of the Board of Directors of the FTA issued Decision No. 13 of 2026 on the Measures, Procedures and Conditions required by Taxable Persons for the Verification of the Validity and Integrity of the Supplies before Deduction of Input Tax (the “Decision”), which comes into effect on 1 October 2026.

The Decision is detailed and prescriptive. It sets out what a Taxable Person must establish about each supplier, what he must establish about each supply, the frequency with which those checks must be repeated, the records and internal policy he must maintain, and the limited circumstances in which the exercise may be skipped altogether.

How the Decision Operates

The Decision’s legal effect is best understood by returning to the structure of Article 54 bis. Clause 1 obliges the FTA to reject a deduction where the supply formed part of a supply or chain of supplies related to Tax Evasion and the Taxable Person was aware of that relation. Clause 2 permits rejection where, based on the circumstances of the supply, the Taxable Person should have been aware of it. Clause 3 then provides that, for the purposes of Clause 2, the Taxable Person is to be treated as having been required to be aware of the connection if he did not verify the validity and integrity of the supplies he receives in accordance with the measures, procedures and conditions determined by the FTA.

The Decision supplies those measures. Its consequence is therefore evidential rather than penal: failure to comply does not of itself create a liability, but it closes off the taxpayer’s ability to argue that he could not reasonably have known. Two points follow, and both are important.

First, the deeming operates only on the knowledge element. The FTA must still establish that the supply formed part of a supply or chain of supplies related to Tax Evasion. Non-compliance with the Decision, without more, does not supply that link, and a taxpayer facing a rejection founded on Article 54 bis should be alert to whether the underlying evasion connection has in fact been established.

Second, and conversely, compliance with the Decision is a floor rather than a safe harbour. It defeats the deeming route in Clause 3, but it does not preclude the FTA from proceeding under Clause 1 on the basis of actual awareness. Nevertheless, a taxpayer who has completed every step in the Decision but ignored an obvious commercial anomaly may not necessarily be fully protected.

Scope and Thresholds

Article 2 applies the Decision to Taxable Persons in relation to the verification of the validity and integrity of the supplies they receive before deduction of Input Tax. Three monetary thresholds then shape how heavily it applies:

The interaction between the first two thresholds deserves attention. The AED 10,000 de minimis is not a general relief for small transactions. Instead, it is disapplied at supplier level once the aggregate reaches AED 100,000 over a rolling twelve-month period, whether looking back or forward. That figure is low by the standards of most commercial supplier relationships, and the practical consequence is that the exception will be available principally for genuinely incidental or one-off suppliers.

Verification of the Supplier

Article 3 requires four categories of check. As to identity, where the supplier is a natural person the Taxable Person must obtain a copy of valid proof of identity, such as an Emirates ID or passport, and must meet the supplier in person or virtually before the supply is made. Where the supplier is a legal person, incorporation must be verified through official databases or by obtaining the certificate of incorporation, with the incorporation details valid and consistent with the entity’s name, address, employees and other related information, and the identity of the director, agent or employee authorised to represent the supplier must be verified in the same manner.

As to address and place of business, the Taxable Person must verify the existence of an actual place of business by appropriate electronic means or a field visit, and must be satisfied that the premises are compatible with the nature of the supplier’s activities.

As to risk, Article 3(3)(a) requires the Taxable Person to ensure that none of three indicators applies –  that the supplier has changed its address more than twice in the previous twelve months, that it has changed its key employees (its managers, or those with whom the Taxable Person deals) more than twice in that period, or that it has undertaken transactions disproportionate or unexpected in volume, value or nature relative to the size and history of its business. Read alone, that is an absolute prohibition. Article 3(3)(b) qualifies it: where an indicator does apply, the Taxable Person must retain a clear and justified explanation and produce it to the FTA on request. The better reading of the two paragraphs together is that a risk indicator is not a bar to dealing with a supplier, but a trigger for documented justification.

The practical difficulty with this limb is informational. A recipient has no independent means of knowing how often a supplier has moved premises or replaced its managers. Compliance might, in practice, depend on supplier declarations and, for significant relationships, contractual undertakings to disclose such changes – a point that should be reflected in onboarding documentation and supply agreements.

Finally, where the AED 375,000 threshold is met, the Taxable Person must obtain written confirmation from an authorised bank in the UAE that the supplier holds a bank account, free of relevant reservations or conditions. He must also review publicly available reviews and media coverage from reliable sources, assessing whether they are consistent with the nature and size of the supplier’s business and disclose no indicators of suspected Tax Evasion.

Verification of the Supply

Article 3 addresses the counterparty; Article 4 addresses the transaction, and applies to each supply received. It requires a general assessment of the conditions of the transaction and satisfaction that the supplier’s engagement rests on genuine commercial reasons.

The payment conditions attract the most specific treatment. The method and terms of payment must be commercially justifiable, and where a third party is involved in making or receiving payment, or where payment is made to a bank account outside the supplier’s country of incorporation, there must be a reasonable commercial explanation that does not contradict the information available to the Taxable Person. More significantly, consideration is to be paid by electronic means. Cash payment is not prohibited outright, but must rest on a documented commercial reason, fall within the thresholds specified in the applicable Tax legislation, and be easily verifiable. For businesses in sectors where cash settlement remains common, this is the provision most likely to require an operational change.

The remaining checks track the recognised indicators of carousel and missing trader arrangements. The Taxable Person must verify that prices or profit margins are not commercially unjustifiable or significantly divergent from market conditions without clear reason; that the goods or services fall within the supplier’s ordinary activity and licensed scope; that the goods are authentic, of verified origin, and owned by the supplier or otherwise within his power of disposal; and, where the supplier acts as an intermediary, that there is a clear and justifiable commercial explanation for his role in the chain. Each of these is a familiar feature of the fraud patterns that gave rise to Article 54 bis, and their appearance here converts what has historically been an audit-stage inquiry into a documented pre-deduction obligation.

Procedures and Records

Article 5 sets the operating rhythm. Supplier verification under Article 3 is required on first dealing and again on recurrent dealings where the supplier has not been verified in the previous twelve months, which establishes an annual refresh cycle. Verification under Article 4 applies to each Taxable Supply received or accepted, subject to the Article 6 exception. The steps taken must be documented and the supporting documents and records retained so as to enable the FTA to verify that they were correctly implemented.

The fourth requirement is the one most likely to be overlooked. The Taxable Person must maintain a documented policy identifying the persons responsible for implementing, reviewing and supervising the verification procedures, setting out their powers and responsibilities clearly, and retained at the designated location for keeping required documents. This is a mandated internal control framework, closely analogous in structure to customer due diligence under the anti-money laundering regime, and it cannot be assembled retrospectively during an audit. A taxpayer who has performed the substantive checks but never adopted the policy will have an obvious gap on the face of his file.

Practical Considerations for Businesses

With effect from 1 October 2026, the following should be treated as immediate priorities:

• Map the supplier base against the three thresholds: Rolling twelve-month values, both historic and expected, determine which suppliers fall within the exception, which require the full Article 3 checks, and which attract the additional bank and reputation checks.
• Build the onboarding file and the annual refresh: Identity documents, incorporation verification, place of business evidence and risk-indicator confirmations should sit in a standard supplier file with a diarised twelve-month review.
• Embed the Article 4 checks in transaction workflow: Price and margin reasonableness, licence scope, origin and title, and the commercial rationale for intermediaries are best captured at purchase order or invoice approval rather than reconstructed later.
• Move settlement to electronic means: Where cash is commercially necessary, the reason should be documented contemporaneously and the payment made readily verifiable.
• Adopt the written policy before the effective date: Named owners, defined powers and a designated retention location are express requirements, not good practice.
• Reflect the obligations in supplier documentation: Declarations and contractual undertakings covering changes of address and key personnel, and cooperation in producing bank confirmations, are the practical means of obtaining information the recipient cannot otherwise verify.

Conclusion

Decision No. 13 of 2026 completes the framework that Federal Decree-Law No. 16 of 2025 began. Where the earlier amendment gave the FTA an express statutory basis for denying Input Tax recovery in chains tainted by Tax Evasion, the Decision now defines the conduct that separates a taxpayer who is deemed to have known from one who is not. In doing so it converts supply-chain diligence from a matter of commercial prudence into a documented tax obligation, with the deduction itself as the sanction.

The framework nonetheless leaves the taxpayer with a substantive position to defend. The deeming provision reaches only the question of knowledge, and the evasion connection remains for the FTA to establish. Businesses that build a complete and contemporaneous verification file before 1 October 2026 will be considerably better placed to make that argument than those who address the Decision only once a recovery has been rejected.

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