The UAE Ministry of Finance has issued Federal Decree-Law No. 16 of 2025, implementing substantial changes to the VAT framework. The law comes into force on 1 January 2026 and affects three key areas – reporting under the reverse charge mechanism, VAT refund deadlines, and enforcement measures targeting tax avoidance through artificial supply chains.
The most notable change concerns the reverse charge mechanism. Under the current system, a company purchasing services from a foreign supplier not registered for VAT in the UAE must issue a self-invoice and report it simultaneously as output and input VAT. From January 2026, this requirement will be abolished. Companies will only need to retain standard supporting documentation – invoices, contracts, and payment records. While the Federal Tax Authority retains the right to request these documents during audits, the VAT filing process itself becomes significantly simpler.
The second amendment enacts a strict time limit for VAT refunds. Previously, there was no formal deadline, allowing companies to submit refund claims several years after an overpayment occurred. The new law sets a five-year limit starting from the completion of the tax assessment. If this period expires, the right to a refund is forfeited. The Ministry presents this measure as a way to eliminate long-outstanding balances and provide businesses with enhanced financial clarity.
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Tax authority gains power to deny deductions in suspected avoidance schemes
The third reform strengthens enforcement against tax evasion. The Federal Tax Authority is now empowered to deny input VAT deductions if a transaction is deemed part of a tax avoidance scheme. This places additional responsibility on buyers, who must assess not only a supplier’s VAT registration status but also the legitimacy of the transaction itself. According to the Ministry, this is a budget protection measure. For businesses, however, it means more extensive due diligence before major purchases. Companies are expected to request from suppliers:
- VAT registration certificates
- confirmation of genuine business activity
- documentation on beneficial ownership and corporate structure
If a supplier is found to be part of an artificial chain created to minimise tax liabilities, the buyer may lose the right to deduct VAT even if all formal requirements were met. This effectively shifts risk from the tax authority to transaction participants. These changes reflect the UAE’s broader move toward tighter tax oversight. The country introduced corporate tax in 2023, expanded information exchange under the CRS framework, and is now strengthening indirect tax controls. Over the past two years, the Federal Tax Authority has conducted a series of audits targeting companies operating through free zones, uncovering schemes involving fictitious imports of services intended to generate VAT deductions.
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The abolition of self-issued invoices simplifies compliance for bona fide businesses but removes an automatic audit trail previously generated within the system. The tax authority is compensating for this by increasing selective audits and documentation requests. Experts observe that recent Dubai real estate news shows a similar trend toward increased oversight in a sector where developers commonly engage international contractors. The five-year VAT refund limit creates difficulties for businesses with long investment cycles. Construction projects, resource development, and large infrastructure contracts often span many years, with VAT overpayments accumulating gradually. Companies that fail to track reconciliation timelines risk losing the right to reclaim substantial amounts.
The Ministry of Finance states that the amendments align the UAE system with international standards, but does not specify any reference jurisdictions. In the European Union, VAT refund limitation periods range from 3 to 10 years, depending on the country, placing the UAE roughly in the middle. For businesses, this means that a full overview of housing prices across Dubai areas becomes increasingly relevant when planning staff-related costs, as tax changes may affect overall operating expenses and call for changes to compensation structures. Companies are recommended to review document retention procedures, update supplier due diligence checklists, and conduct audits of all outstanding VAT refund positions to avoid losing reimbursement rights after 1 January 2026.
