FTA Issues New Directive on the Valuation of Deemed Supplies of Services for UAE VAT
Directive on Tax Transactions No. 5 of 2026
The UAE Federal Tax Authority (FTA) has issued Directive on Tax Transactions No. 5 of 2026, providing a prescribed methodology for determining the value of deemed supplies of services under Article 37 of the UAE VAT Law.
The Directive introduces a standardized cost-based approach that taxpayers must apply when calculating the value of deemed supplies of services, replacing the uncertainty that previously existed in determining the taxable value.
What is a Deemed Supply?
Under the UAE VAT Law, certain services provided without consideration (or for non-business purposes) are treated as deemed supplies and may still be subject to VAT.
Examples may include:
- Free services provided for non-business purposes;
- Personal use of business services;
- Services provided to employees or related parties where the conditions for a deemed supply are met.
Key Changes Introduced by the Directive
The FTA has clarified that the value of a deemed supply of services must be determined based on the costs on which input VAT was incurred, including both:
- Direct costs; and
- Indirect costs.
The Directive prescribes the following methodology.
Step 1 – Determine the Open Market Value
Identify the Open Market Value (OMV) of the services constituting the deemed supply.
Where an OMV cannot be established, taxpayers should use the value of comparable services.
Step 2 – Remove the Profit Element
The estimated total cost of providing the service should be calculated by removing the profit component from the OMV.
The formula is:
Estimated Cost = Open Market Value ÷ (1 + Net Profit Margin)
The net profit margin should be based on:
- the taxpayer’s previous year’s financial statements; or
- where unavailable, the average profit margin applicable to the relevant industry.
Step 3 – Determine the Percentage of VATable Costs
Calculate:
Costs on which Input VAT was incurred
divided by
Total costs incurred during the previous financial year
This percentage represents the proportion of costs that carried recoverable input VAT.
Step 4 – Calculate the Value of the Deemed Supply
Apply the percentage calculated in Step 3 to the estimated cost determined in Step 2.
The resulting amount represents the value of the deemed supply for VAT purposes under Article 37 of the VAT Law.
Practical Example
Assume a company provides free consulting services to a related party, and the transaction constitutes a deemed supply under Article 37 of the UAE VAT Law.
The following information is available:
- Open Market Value (OMV) of the service: AED 100,000
- Net Profit Margin (previous financial year): 25%
- Total costs incurred during the previous financial year: AED 20,000,000
- Costs on which input VAT was incurred: AED 16,000,000
Step 1 – Determine the Open Market Value
Open Market Value = AED 100,000
Step 2 – Remove the Profit Element
Estimated cost of providing the service:
AED 100,000 ÷ (1 + 25%) = AED 80,000
Step 3 – Determine the Percentage of VATable Costs
Percentage of costs on which input VAT was incurred:
AED 16,000,000 ÷ AED 20,000,000 = 80%
Step 4 – Determine the Value of the Deemed Supply
AED 80,000 × 80% = AED 64,000
Accordingly, the value of the deemed supply for VAT purposes is AED 64,000.
If the supply is subject to the standard rate of VAT, the output VAT would be:
AED 64,000 × 5% = AED 3,200
Recommended Actions
Taxable persons should consider:
- Reviewing whether deemed supplies arise within their business.
- Assessing whether their current valuation methodology complies with the Directive.
- Reviewing historical profit margins and cost allocation methodologies.
- Ensuring adequate documentation supporting the valuation calculations.
- Updating internal VAT policies and procedures where necessary.
Effective Date
The Directive was issued on 20 July 2026 and takes effect upon its publication in the UAE Official Gazette.
At XB4, we assist businesses with interpreting new tax legislation, assessing the impact on their operations, updating VAT policies and procedures, reviewing contractual arrangements, and supporting compliance with UAE tax requirements. Our tax specialists are available to help businesses evaluate these new directives and implement any necessary changes to their VAT reporting processes.
