The UAE’s tax landscape is undergoing a significant transformation. In a move designed to enhance administrative efficiency, regulatory certainty, and transparency, the Ministry of Finance has announced the issuance of Federal Decree-Law No. (16) of 2025 (amending the VAT Law) and Federal Decree-Law No. (17) of 2025 (amending the Tax Procedures Law).

These sweeping changes, which will come into force on January 1, 2026, are crucial for all businesses operating within the UAE. They aim to simplify processes for compliant taxpayers while simultaneously strengthening the framework to combat tax evasion, aligning the nation’s system with international best practices. The changes simplify compliance by relieving taxpayers from issuing self-invoices for the Reverse Charge Mechanism, provided they retain supporting documents, but critically introduce a strict five-year limitation period for reclaiming or utilising excess refundable tax, with a special transitional year granted for resolving historic claims dating back to 2018-2020. Furthermore, the amendments grant the FTA new powers to issue binding directions for consistent law application and to deny input tax deductions if a supply is linked to a tax-evasion arrangement, placing a greater emphasis on taxpayer due diligence.

Major changes

1. VAT Simplification: Goodbye to Self-Invoicing

A key procedural simplification for VAT registered businesses is the elimination of a long-standing administrative burden:

• Reverse Charge Mechanism (RCM) Relief: Taxable persons are relieved from the requirement to issue a self-invoice when applying the Reverse Charge Mechanism, particularly for the import of services.
• The New Requirement: Instead of issuing a self-invoice, taxpayers must retain appropriate supporting documents related to the supply transactions, as specified by the Executive Regulation.

Impact: This change enhances administrative efficiency, reduces unnecessary paperwork, and still provides the Federal Tax Authority (FTA) with clear audit evidence, making compliance smoother for businesses engaged in cross-border transactions.

2. Five-Year Limit: Defining Financial Certainty

Both Decree-Laws introduce definitive statutes of limitation to provide much-needed financial certainty for businesses and the FTA alike.

The Five-Year Deadline

A strict five-year time limit is now established for key financial actions, preventing the build-up of old, unresolved balances:

• For Taxpayers: You must submit requests to reclaim any excess refundable tax (credit balance) or use that credit to settle other tax liabilities within this five-year window. Once this period lapses, the right to reclaim or use the tax expires permanently.
• For the FTA: The Authority must also apply any taxpayer credit or overpayment against outstanding tax obligations within this same five-year period.

Flexibility and Transitional Rules

The law includes provisions to protect taxpayer rights in exceptional situations:

• Late Credit Balances: If a credit balance arises after the five-year period has already expired, or within the last 90 days of that period, the taxpayer is granted an additional, specific window (e.g., 90 days or one year, depending on the case) to submit a refund request.
• Transitional Relief (Urgent Action Required): For taxpayers with credit balances where the five-year period expired before January 1, 2026 or will expire within one year from that date, a special one-year window is provided. They must submit their refund request within one year from January 1, 2026 (i.e., by December 31, 2026).

3. Expanded Audit Powers and Binding Directions

The amendments also adjust the powers and limitations of the Federal Tax Authority (FTA):

• Extended Audit Limitation: While the standard audit period remains five years, the FTA is granted the power to conduct tax audits or issue tax assessments after the expiry of the limitation period in certain cases. The most notable example is when a taxpayer submits a refund request in the final (fifth) year of the limitation period. This allows the FTA an extended, specific period (e.g., two years from the date of the request) to verify the claim.

4. Shared Responsibility: Heightened Anti-Evasion Measures

To combat tax evasion and reinforce the integrity of the tax system, new, stricter compliance measures are being introduced:

• Input Tax Deduction Denial: The FTA is explicitly authorised to deny the deduction of Input Tax if it determines that the supply forms part of a tax-evasion arrangement.
• Taxpayer Due Diligence: Taxpayers are now formally required to verify the legitimacy and integrity of supplies before claiming input tax deduction, in line with FTA-set procedures.

Impact: This provision reinforces the principle of shared responsibility across the supply chain, requiring businesses to conduct necessary due diligence on their vendors to safeguard against being implicated in tax-evasion schemes.

Amended Articles: Federal Decree-Law No. 17 of 2025 (Tax Procedures Law)

Actions to be taken for businesses

The January 1, 2026 effective date is fast approaching. Businesses should immediately focus on the following to ensure full compliance and avoid forfeiture of rights:

1. Review Historical Balances: Urgently identify all pre-2021 excess refundable tax (credit) balances and ensure they are claimed or offset before December 31, 2026 under the transitional provisions.
2. Update RCM Procedures: Review internal accounting processes to eliminate the generation of self-invoices for reverse charge transactions, focusing instead on robust retention of the primary supporting documents.
3. Strengthen Due Diligence: Enhance Know Your Vendor (KYV) processes to verify the legitimacy of suppliers before claiming Input Tax to mitigate the risk of denial under the new anti-evasion rules.

Source:

1. Federal Decree-Law No. 17 of 2025 – Issued 1 Oct 2025 (Effective 1 Jan 2026)

2. Federal Decree-Law No. 16 of 2025 – Issued 1 Oct 2025 (Effective from 1 Jan 2026)

3. UAE MOF website