On 20 July 2026 the Federal Tax Authority issued Directive on Tax Transactions No. 5 of 2026, which sets out for the first time exactly how to put a number on a service you gave away. Until then Article 37 of the VAT Law said only that the value of a deemed supply is “the total cost incurred by the Taxable Person”, and everyone was left to argue about which costs counted. The Directive replaces that argument with a four-step calculation, and because FTA Directives bind the Authority as well as the taxpayer, it is not guidance you can take or leave.
This guide covers the deemed supplies VAT UAE rules as they stand in 2026: the four situations that create a deemed supply, the five exceptions that kill one, the AED 500 gift limit and the AED 2,000 output tax floor, how the new valuation method works on a real number, and the Designated Zone provisions that decide whether any of it reaches your company. It is general information rather than advice on your own position, and a registered tax agent should confirm how it lands on your facts.
A deemed supply is the VAT you owe when nobody paid you
Article 11 of Federal Decree-Law No. 8 of 2017 on Value Added Tax, as amended, lists four cases. Each exists for the same reason: you recovered input tax on the basis that something would end up in a taxable sale, and then it did not.
Assets given away. A supply of goods or services that made up the whole or part of the assets of the business but are no longer considered as such, where the supply was made without Consideration. A used laptop handed to a departing employee, surplus fit-out passed to a neighbouring tenant, shelving donated when you consolidate a warehouse.
Goods moved to or from an Implementing State. A transfer of goods forming part of the business assets between the UAE and your business in an Implementing State, in either direction. Two narrow carve-outs apply: the transfer is temporary under the Customs Legislation, or it is made as part of another taxable supply of the same goods. Free zone traders with a GCC branch structure meet this more often than they expect.
Non-business use. Where input tax may be recovered on goods or services and those goods or services are then used wholly or partly for purposes other than business, there is a deemed supply, and it is deemed only to the extent of the non-business use. Part-time private use produces a part-sized charge, not a full one.
Deregistration. Goods and services the taxable person owns at the date of tax deregistration, in full, on that date.
Article 26(3) fixes the tax point for all four: the date of supply, disposal, change of use, or the date of deregistration, whichever applies. That matters more than it sounds, because a change of use has no invoice and no payment to anchor it. If nobody tells finance that a machine moved from the production line to a shareholder’s villa, the return for that period is already wrong.
Five exceptions kill a deemed supply, and the first does most of the work
Article 12 sets out when a supply is not treated as deemed:
- No input tax was recovered on the related goods or services. If nothing was claimed, nothing is clawed back.
- The supply is an Exempt Supply.
- The recovered input tax has already been adjusted under the Capital Assets Scheme.
- Goods supplied as samples or commercial gifts where the value to each Recipient in a 12-month period does not exceed the amount set in the Executive Regulation.
- Total output tax due on all deemed supplies for a person in a 12-month period is less than the amount set in the Executive Regulation.
Two points are easy to miss. The samples and gifts exception covers goods only; there is no equivalent de minimis for a service you performed for free. And the last two exceptions both defer their numbers to the Executive Regulation, which is where the figures people actually quote come from.
AED 500 per recipient and AED 2,000 of output tax are the two numbers that matter
Article 5 of Cabinet Decision No. 52 of 2017, the VAT Executive Regulation, supplies both. It was rewritten by Cabinet Decision No. 100 of 2024, in force from 15 November 2024, so check anything published before that date before relying on it.
| Provision | What it limits | Amount | Period |
|---|---|---|---|
| Article 5(1), for Article 12(4) | Value of goods supplied as samples or commercial gifts, per recipient | AED 500 | 12 months |
| Article 5(2)(a), for Article 12(5) | Total output tax payable on all deemed supplies, per supplier | AED 2,000 | 12 months |
| Article 5(2)(b), for Article 12(5) | Same, where supplier and recipient are both a Government Entity or a Charity | AED 250,000 | 12 months |
| Article 5(3) | How the 12 months are counted | Rolling look-back | Ends at the close of the month of supply |
Article 5(3) is the clause most compliance calendars get wrong. The 12-month period is the period preceding the end of the month in which the person makes the supply. It moves every month. It is not your financial year, not the calendar year and not the tax period, so a spreadsheet that resets each January will let a recipient drift over the line unnoticed in March.
The AED 2,000 wording deserves a careful read. Article 5(2) says the total output tax payable on all deemed supplies shall not exceed AED 2,000 for each supplier in a 12-month period, “and any amount exceeding this threshold shall be considered Payable Tax”. Read literally, the first AED 2,000 is an allowance and only the excess is in charge. Read as a pass or fail test, breaching AED 2,000 pulls the whole figure in. The text supports the first reading, but the difference is real money in a borderline year, and it is worth putting to your tax agent in writing rather than settling from a blog post, this one included.
Eight AED 100 gifts to one client is a deemed supply; the same eight to eight clients is not
The AED 500 test is measured per recipient, not per campaign and not per budget line. That single design choice decides most real cases.
Take a free zone trading company buying branded gifts at AED 100 each and recovering the input tax. Send eight to the same commercial manager at your largest client over the year and the value to that recipient is AED 800. Article 12(4) fails and the gifts become a deemed supply. Send the same eight items to eight managers at eight different clients and each has received AED 100, comfortably clear.
| How the gifts are spread | Recipients | Value per recipient | Against AED 500 | Result |
|---|---|---|---|---|
| Eight AED 100 gifts, one client contact | 1 | AED 800 | Over | Deemed supply |
| Eight AED 100 gifts, eight client contacts | 8 | AED 100 | Under | Article 12(4) applies |
| One AED 600 hamper | 1 | AED 600 | Over | Deemed supply |
| Fifty AED 90 items at a trade show | 50 | AED 90 | Under | Article 12(4) applies |
Because the window rolls, the gift that breaks the threshold is rarely the expensive one. It is the ninth small one, given eleven months after the first. A per-recipient running total, kept by company and contact rather than by marketing campaign, is the only version of this control that works. Record what you need to prove the total and no more; you are tracking a spend figure, not building a personal data file.
Directive No. 5 of 2026 tells you how to value a service you never invoiced
Article 37 gives the principle: the value of the deemed supply is the total cost incurred to make it. Directive on Tax Transactions No. 5 of 2026 gives the method, and it applies to services only. Deemed supplies of goods stay on the plain Article 37 cost rule.
Clause 1 sets the target: the value is the total costs on which input tax was incurred, direct and indirect, to make that deemed supply. Clause 2 then works backwards to that figure from a price rather than forwards from a ledger, which is the interesting part. You start with what the service is worth in the market, strip out the profit, then strip out the share of your cost base that never carried input tax.
- Step (a). Determine the open market value of the services making up the deemed supply. If that cannot be determined, use the open market value of comparable services.
- Step (b). Remove the profit element by dividing the open market value by (1 + the net profit margin). The margin comes from your financial statements for the preceding financial year. If your own margin cannot be determined, the average net profit margin prevailing in your sector may be used.
- Step (c). Work out the percentage that costs carrying input tax represent of your total costs for the previous financial year.
- Step (d). Apply the percentage from step (c) to the estimated total cost from step (b).
Clause 3 confirms the result is the value of the deemed supply of services for Article 37 purposes. Two consequences follow. Your prior-year financial statements are now a live VAT input rather than a reporting output, so the year you close in the spring sets the arithmetic you use for the next twelve months. And step (c) is what stops salaries inflating the charge: payroll carries no input tax, so a people-heavy business lands on a lower ratio and a smaller deemed supply than one that buys in most of its capacity.
The four steps on a real number
A free zone consultancy seconds two staff to its sister company for three months and charges nothing. It recovered input tax on its overheads, so this is a deemed supply of services.
| Step | Working | Result |
|---|---|---|
| (a) Open market value of comparable secondment services | Market rate for the three months | AED 300,000 |
| (b) Strip the profit element, prior-year net margin 20% | 300,000 ÷ 1.20 | AED 250,000 |
| (c) Costs carrying input tax as a share of prior-year total costs | 2,600,000 of 4,000,000 | 65% |
| (d) Value of the deemed supply | 250,000 × 65% | AED 162,500 |
| Output tax at the standard 5% rate | 162,500 × 5% | AED 8,125 |
Charging VAT on the AED 300,000 market rate instead would have produced AED 15,000, so following the Directive avoids overstating the liability by AED 6,875. At AED 8,125 the transaction is also well past the AED 2,000 figure in Article 5(2)(a) on either reading of that clause, so the Article 12(5) exception does nothing here. One unbilled secondment can exhaust a year of deemed supply headroom on its own.
Designated Zone status moves goods outside the State; it does not move you outside Article 11
Article 50 treats a Designated Zone meeting the Executive Regulation’s conditions as being outside the State, and Article 52 then hands the Executive Regulation power to say when business inside one is regarded as conducted in the State anyway. Article 51 does exactly that, and three clauses decide how the deemed supplies VAT UAE rules reach a zone company.
Article 51(10) is the foundation: any person established, registered or resident in a Designated Zone is deemed to have a Place of Residence in the State for the purposes of the Decree-Law. A zone company is a UAE-resident taxable person that registers, files and accounts for deemed supplies on the same footing as a mainland trader. If the registration question is still open, our guide to voluntary VAT registration for free zone companies covers the threshold and input tax recovery.
Article 51(6) settles services in one line: the place of supply of any services is inside the State if the place of supply is in a Designated Zone. Designated Zone status is a goods concept. A free service performed by a zone company is supplied in the UAE, which is precisely why Directive No. 5 of 2026 is a zone company’s problem too. The wider position is set out in our note on VAT on free zone to free zone services.
Article 51(5) covers goods supplied within a Designated Zone to a person to be consumed by him or another person: the place of supply is in the State, unless the goods are incorporated into, attached to, become part of or are used in producing another good in the same zone that is not itself consumed, or were delivered outside the State with supporting commercial or official evidence plus customs evidence of removal, or were moved inside the State and the supplier holds official evidence that VAT was applied on that import.
Which zones qualify is not a permanent fact. A Designated Zone must be a specific fenced geographic area with security measures and Customs controls monitoring the entry and exit of individuals and the movement of goods, must have internal procedures for keeping, storing and processing goods, and its operator must comply with the Authority’s procedures. A zone that changes how it operates or breaches those conditions is treated as inside the State. The list is fixed by Cabinet Decision and amended from time to time, so check the decision in force rather than a list on a consultancy website. Our guide to UAE free zone VAT, Designated Zones, registration and filing sets out the framework.
A stock shortage in a Designated Zone is an import, not a deemed supply
Article 51(9) catches warehouse operators, and it does not care whether you gave anything to anyone. Goods located in a Designated Zone on which the owner has not paid tax are treated as imported into the State if the owner consumes them, unless they are incorporated into, attached to or used in producing another good located in a Designated Zone that is not itself consumed. The same treatment applies where there is a shortage in goods.
Read that second limb again. A stock count that comes up short is a VAT event: not a deemed supply, an import, on untaxed goods. Shrinkage, breakage recorded late, a pallet written off without paperwork, an item taken from bonded stock for use in the office. Each lands here rather than in Article 11, and the charge is usually larger than the deemed supply treatment people expect. The duty side of the same movement is a separate question, covered in our guide to the Designated Zone customs duty refund and bank guarantee release rules.
If input tax was blocked at purchase, there is no deemed supply on the way out
Article 53 of the Executive Regulation, also amended by Cabinet Decision No. 100 of 2024, lists the input tax you may not recover. It interlocks with Article 12(1), which says a supply is not deemed where no input tax was recovered. Blocked at the front door means no charge at the back door.
Input tax is non-recoverable where entertainment services are provided to anyone not employed by the person, including customers, potential customers, officials, shareholders, other owners and investors. Entertainment services means hospitality of any kind, including accommodation, food and drinks not provided in the normal course of a meeting, access to shows or events, and trips for pleasure or entertainment. Take a prospect to dinner and the VAT was never yours to claim, so there is no deemed supply to declare either.
Recovery is also blocked on motor vehicles purchased, rented or leased for use in the business and available for personal use by any person. A motor vehicle here is a road vehicle designed or adapted to carry no more than ten people including the driver, which excludes a truck, forklift, hoist or similar vehicle. Three categories are not treated as available for private use at all: a taxi licensed by the competent authority, a vehicle registered and used as an emergency vehicle, and a vehicle rented to customers in a vehicle rental business.
The employee limb carries the exceptions. Goods or services bought to be used by employees free of charge for their personal benefit are blocked, except where it is a legal obligation under the labour law applicable in the State or the Designated Zone, where it is a contractual obligation or documented policy provided so they can do their job and provably normal business practice, where it is health insurance including enhanced cover for employees and family up to one spouse and three children under eighteen, or where the provision is itself a deemed supply under the Decree-Law.
That last exception loops back deliberately: if the benefit is a deemed supply, the input tax is not blocked, so you recover the tax and account for it as a deemed supply instead of losing it at purchase. The practical failure mode runs the other way. A company that recovered input tax it was never entitled to on client entertainment does not have a smaller problem, it has two, and correcting the input tax side may pull it into the voluntary disclosure rules and their penalties.
Deregistration turns every remaining asset into a final taxable event
Article 11(4) applies to goods and services owned at the date of tax deregistration. For a free zone company this is not an edge case; it is what happens on a licence cancellation, a liquidation, a migration to the mainland, or a restructuring that collapses one entity into another.
The mechanics are simple and the size is not. Article 26(3) puts the tax point on the deregistration date, Article 37 values it at total cost incurred, and everything still on the books on which input tax was recovered comes into the final return: stock, fit-out, IT equipment, plant. A company carrying AED 2,000,000 of such assets faces AED 100,000 of output tax on a return filed at the exact moment it has stopped trading and is least able to fund it.
The same logic sits behind Article 11(2). Move business assets to a group entity across a GCC border and, unless the movement is temporary under the Customs Legislation or forms part of another taxable supply of those goods, you have a deemed supply valued at cost in the UAE.
What to actually check before your next return
None of this needs a new system. It needs six questions asked before the return is filed rather than after the audit letter arrives.
- Unbilled services. List every intercompany secondment, shared service, management charge and facility used by a related party at no charge, and value each through the four steps in Directive No. 5 of 2026 rather than at market rate.
- Prior-year inputs. Pull two figures from last year’s financial statements and hold them where the VAT team can find them: the net profit margin, and the proportion of total costs that carried input tax.
- Gift totals by recipient. Run a per-recipient total against the rolling AED 500 line, with the window ending at the close of the month of the latest gift, not at year end.
- The AED 2,000 running total. Track cumulative output tax on all deemed supplies across the same rolling window, and know which reading of Article 5(2)(a) your tax agent supports before you need it.
- Zone stock reconciliation. Treat every shortage and every internal consumption of untaxed Designated Zone stock as an Article 51(9) import question and clear it in the period it arises.
- Blocked input tax. Confirm nothing was recovered on non-employee entertainment or on vehicles available for private use. Where it was, fix the input tax first; the deemed supply position follows from it.
What changed in 2026 is not that the deemed supplies VAT UAE rules got harder. Articles 11 and 12 have read the same way for years. The Authority has now published the arithmetic for services, which removes the excuse for a rough estimate and makes an unexplained number easier to challenge. Getting the four steps right is a smaller job than defending a figure you cannot reconstruct.
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Frequently Asked Questions
What is a deemed supply under UAE VAT?
A deemed supply is a transaction on which you must account for output tax even though no customer paid you. Article 11 of Federal Decree-Law No. 8 of 2017 sets out four cases: disposing of business assets without Consideration, transferring goods to or from your business in an Implementing State, using goods or services on which input tax was recovered for non-business purposes, and holding goods or services at the date of tax deregistration.
Do free zone companies have to account for deemed supplies?
Yes. Article 51(10) of the Executive Regulation deems any person established, registered or resident in a Designated Zone to have a Place of Residence in the State for the purposes of the VAT law. Designated Zone status changes the place of supply of certain goods; it does not switch off Articles 11 and 12. Article 51(6) puts the place of supply of any service in a Designated Zone inside the State, so free services are fully in scope.
How much can I give away as samples or gifts before VAT applies?
Article 5(1) of the VAT Executive Regulation sets the limit at AED 500 of goods per recipient in a 12-month period, and it applies only where the goods were supplied as samples or commercial gifts. Article 5(3) makes that window a rolling look-back ending at the close of the month in which you make the supply, so the total resets continuously rather than at your year end.
How do I value a service I provided for free?
Use the four steps in Directive on Tax Transactions No. 5 of 2026, issued on 20 July 2026. Take the open market value of the service or a comparable service, divide it by one plus your prior-year net profit margin to strip out profit, calculate the percentage of your prior-year total costs that carried input tax, and apply that percentage to the result. That figure is the value of the deemed supply for Article 37 purposes.
Does the AED 2,000 threshold mean the first AED 2,000 is free?
Article 5(2)(a) says total output tax on all deemed supplies must not exceed AED 2,000 for each supplier in a 12-month period, and that any amount exceeding this threshold shall be considered Payable Tax. On a literal reading only the excess is payable. The alternative reading treats AED 2,000 as a pass or fail test that brings the whole amount into charge once breached. Confirm which position your tax agent takes before relying on either.
Is a stock shortage in a Designated Zone a deemed supply?
No, it is treated as an import. Under Article 51(9) of the Executive Regulation, goods in a Designated Zone on which the owner has not paid tax are treated as imported into the State where the owner consumes them or where there is a shortage in goods. That is a separate charge from the Article 11 deemed supply rules and it is usually the larger of the two.
If VAT was blocked when I bought something, do I still owe tax when I give it away?
No. Article 12(1) of the VAT law says a supply is not deemed where no input tax was recovered on the related goods or services. Article 53 of the Executive Regulation blocks recovery on entertainment for non-employees, on motor vehicles available for private use, and on goods and services provided free to employees for their personal benefit, subject to four exceptions. Where recovery was blocked, giving the item away creates no deemed supply.