MIDDLE EAST TAX ALERT | UAE | PROFIT MARGIN SCHEME
The UAE Federal Tax Authority (FTA) has released its Guide on the Profit Margin Scheme (PMS) (Guide VATGPM1) in January 2026. This alert highlights the key clarifications, compliance implications, and next steps for affected taxpayers.
Background
PMS is a long-standing VAT mechanism intended to prevent the cascading effect of double taxation where goods are resold without a clear input tax recovery on the purchase of such goods. Under PMS, VAT is charged on the difference between the selling price and the acquisition price (the “margin”), rather than on the full consideration.
The guide formalises the scheme’s scope and application, in areas such as goods import scenarios, blocked input tax, and documentation requirements.
Key Highlights of VATGPM1
| Sr. No. | Topic | Detailed Explanation | Comments |
|---|---|---|---|
1
| Eligible Goods
| Article 29(2) of ER[1] lists only three eligible goods for PMS: (a) Second‑hand goods; (b) Antiques older than 50 years; and (c) Collectors’ items. However, the FTA Guide clarifies that PMS may also apply to goods falling under Article 53 of ER (blocked input tax), even if these goods are not listed as “Eligible Goods” as per Article 29(2) of ER. This broadens PMS applicability where VAT cascading arises due to non‑recoverable input tax which is a logical approach. | Important expansion and clarity. See Example no. 1 and A&M Comments |
2
| Eligibility Conditions
| PMS may be used where goods are purchased from non‑registrants, suppliers already applying PMS, or where input tax was blocked under Article 53 of ER. The reseller must ensure the goods were previously subject to VAT and maintain documentary proof such as prior tax invoices, insurance papers or registration details. | Reinforces burden of proof on taxpayers. Evidence may need to be produced in case of a tax audit. |
3
| Exclusion Scenarios
| The Scheme cannot be applied where: (a) The supplier issues a VAT invoice showing the VAT amount; (b) Import VAT is recoverable; (c) Goods were acquired before VAT introduction (pre‑2018); (d) Refurbishment changes the basic nature of the good, effectively creating a “new” good. For example, old aircraft equipment converted as a furniture item after refurbishment. | Designed to prevent incorrect PMS application.
|
4
| Pre-Approval from FTA
| A Pre-approval from FTA is not required. However, invoicing and record keeping requirements (as discussed below) need to be met.
| Reinforces prior understanding on application of PMS.
|
5
| VAT Computation
| VAT is computed only on the profit margin, which is the Selling Price minus Purchase Price (VAT‑inclusive). The fraction 5/105 (or margin/21 shortcut) applies. The Guide includes various sectors specific numerical examples. Where ancillary supplies are made which are directly linked to the sale of Eligible Good (e.g. non optional accessories fitted in a used car during repairs, which are necessary and incidental to the supply of the car), such payments should be included in Selling Price. Additional goods/services supplied but which are not necessary or incidental to the supply should be treated as a separate supply, subject to normal (non-PMS) rules. | Simplifies dealer calculations.
|
6
| Record‑Keeping Requirements
| Businesses must maintain stock books, purchase records, self‑issued invoices (with mandatory particulars) for purchases from non-registrants, and evidence that VAT was previously imposed.
| Aligns with Article 29(6) of ER. The FTA emphasises audit‑ready documentation, especially when applying PMS to Article 53 goods. |
7
| Invoicing Rules
| Invoices must clearly state that VAT is charged based on the profit margin. Importantly, the VAT amount must NOT be shown. Showing VAT explicitly disqualifies the transaction from PMS.
| Critical compliance requirement.
|
8
| Netting off Profit and Loss Transactions
| Where goods are sold at a loss, the FTA clarifies that loss positions cannot be offset against profits on other goods under PMS. Margin must be calculated on an individual item basis.
| Accounting and ERP systems may need enhancements to support item-level tracking.
|
9
| Reporting Requirements
| Specific checkbox of VAT return form 201 should be selected in case PMS is used in a particular tax period. Resellers applying the Scheme must report PMS supplies in Box One of the VAT Return for the Tax Period in which the supply is made. – Amount Column: Selling Price less the VAT imposed on the Profit Margin – VAT Amount Column: VAT imposed on the Profit Margin Resellers must also declare the Purchase Price of goods intended to be sold under PMS in the Amount column of Box Nine in the Tax Period the goods are acquired, with no VAT amount shown for these purchases. Usual Emirate wise reporting rules | Consistent with VAT Returns User Guide.
|
[1] Cabinet Decision No. 52 of 2017 on the Executive Regulation of the Federal Decree‑Law No. 8 of 2017 on Value Added Tax, and its amendments (“ER”).
Examples
1) New yacht purchased by a Real Estate company for private events for clients or real estate brokers
As the yacht is newly purchased to be used for entertainment of customers or invite only events, the input tax on such a purchase and associated expenses may not be recovered as it was blocked under Article 53 of ER. The following shall be the VAT treatment on sale of the yacht under PMS.
| Particulars | Amount (AED) |
| Purchase Price | 3,000,000 |
| Selling Price | 3,200,000 |
| Net Profit | 200,000 |
| VAT on Profit Margin | 9,523.81 |
Since input tax was blocked under Article 53 of ER, the reseller may apply PMS on the sale of the yacht.
VAT is due only on the margin, not the full selling price.
A&M Comments: We note that a new yacht purchased cannot be classified as “Eligible Goods” under Article 29(2) of ER, as typically Eligible goods can only be limited to secondhand goods as per definition provided. The guide has categorically expanded the scope of PMS in this case which is a welcome move for the industry.
Conclusion
Overall, the guide reinforces the legislative aspects of the PMS. As such, taxpayers should consider the following actions:
- Perform a PMS compliance review against the new guide.
- Update documentation standards to ensure evidentiary requirements are met.
- Revise invoicing templates and controls to prevent VAT disclosure on PMS supplies.
- Enhance VAT return processes to reflect prescriptive reporting requirements.
- Reassess import PMS positions, particularly where deferred or recoverable VAT was involved.
- Align ERP/financial systems to support item-level margin calculations.
