MIDDLE EAST TAX ALERT | UAE | Adjustments Following Exit from a VAT Group
Directive on Tax Transactions No. 2 of 2026 | Effective August 1, 2026
KEY MESSAGE A former VAT group member that remains VAT-registered must report qualifying post-exit adjustments in its own VAT return, even when the underlying supply or expense was originally declared through the VAT group. |
Overview
The UAE Federal Tax Authority (FTA) has issued Directive on Tax Transactions No. 2 of 2026, clarifying the treatment of output tax and input tax adjustments when a registrant exits a UAE VAT group but continues to remain registered for VAT on a standalone basis.
The Directive was issued on July 8, 2026, and takes effect on August 1, 2026.
What Has Changed?
Where a person ceases to be a member of a VAT group, remains VAT-registered after leaving the group, and subsequently identifies an adjustment relating to a taxable supply made or taxable expense incurred before leaving the group, the former member must report that adjustment in its own VAT return. This applies even if the original supply or expense was reported in the VAT group’s return.
| 1 Exit | 2 Continued Registration | 3 Later Adjustments |
| The person ceases to be a member of a VAT group. | The person remains registered for VAT on a standalone basis. | An adjustment relates to a pre-exit taxable supply or taxable expense. |
Adjustments Covered
- Reductions in the value of taxable supplies previously declared in the VAT group’s returns.
- Reductions in taxable expenses for which the related input tax was previously recovered through the VAT group’s returns.
These adjustments do not appear to cover errors that may require voluntary disclosures to correct historical filing positions. Accordingly, members of the VAT group should remain jointly and severally liable for VAT liabilities for the relevant period during which they were VAT grouped.
Practical Implications
The Directive addresses the reporting position when the event giving rise to an adjustment occurs after a member has left a VAT group. Depending on the facts, potentially relevant items may include the following:
| Potential Triggers | Practical Scenarios |
|---|---|
Post-exit tax credit notes | Tax Credit notes issued to adjust output tax due to: Bad debt relief adjustments. |
Input tax corrections | Reductions in expenses for which input tax was previously recovered through the VAT group. |
Documentation Requirements
The former member must retain supporting documents and records evidencing that the adjustment relates to taxable supplies or taxable expenses previously declared in the VAT group’s returns. In practice, businesses should preserve a clear, transaction-level link between the original group reporting and the later standalone adjustment.
M&A Considerations
The Directive is particularly relevant in M&A transactions where a target entity (forming part of a wider VAT group) is required to exit the group due to the change in ownership of its share capital. Practically, the parties should consider addressing post-completion VAT adjustment responsibilities expressly within the transaction documents.
DEAL POINT The Sale and Purchase Agreement (SPA) should distinguish between (i) the legal obligation to report an adjustment, which may rest with the former VAT group member, and (ii) the contractual allocation of the resulting economic benefit, cost, or exposure between buyer and seller. |
SPA Clauses To Consider
The following clauses may need to be considered in addition to the standard tax covenant and indemnification approach adopted by buyers and sellers in an SPA.
| SPA Area | Suggested Coverage |
|---|---|
| Historical information access | Seller access and delivery obligations for VAT group returns, transaction data, invoices, credit notes, and supporting records. |
| Cooperation covenant | Mutual assistance in identifying, calculating, substantiating, and reporting post-completion adjustments. |
| Notification mechanics | Prompt notification where either party becomes aware of a credit note, rebate, bad debt, price adjustment, or other relevant event concerning a pre-completion transaction. |
| Return preparation and filing | Responsibility for preparing the adjustment and ensuring it is included in the target’s standalone VAT return. |
| Economic allocation | Allocation of the cash benefit or VAT cost associated with the adjustment. |
| Records and audit support | Retention, access and assistance obligations for any FTA audit, verification, or inquiry. |
Finance and Accounting Considerations
- Historical Transaction Review: Identify supplies and expenses reported through the VAT group that may remain subject to future adjustment after exit.
- Data and Document Access: Ensure the former member can access historical invoices, credit notes, VAT return workings and evidence of original reporting or recovery.
- Systems and Controls: Update ERP tax codes and VAT return processes so qualifying post-exit adjustments are captured under the former member’s standalone VAT registration.
- Reconciliation: Maintain a transaction-level bridge between the amount originally reported by the VAT group and the adjustment subsequently reported by the former member.
- Roles and Responsibilities: Document who will identify, calculate, support, and report adjustments arising after exit.
Recommended Immediate Action
Businesses that have recently removed an entity from a VAT group or are contemplating a disposal or restructuring involving a VAT group member should review their data access, reporting controls and contractual arrangements before the Directive becomes effective on August 1, 2026.
How A&M Can Help
- Assess the impact of the Directive on existing or planned VAT group restructurings.
- Review historical VAT group transactions and identify potential future adjustments.
- Design post-exit reconciliation, governance, and documentation procedures.
- Advise on VAT considerations in M&A transactions and support the drafting or review of relevant SPA tax provisions.
Review the reporting of qualifying post-exit adjustments in standalone VAT returns.
