When a client stops paying, most free zone owners assume the 5% is at least recoverable. It often is not. VAT bad debt relief UAE rules only hand back output tax you already declared and paid to the Federal Tax Authority (FTA) — and a large share of free zone billing never carried output tax in the first place.
That is the trap. A goods movement between designated zones that fell outside the scope of UAE VAT, or an export that was zero-rated, produced no output tax, so there is nothing for the relief to return. Meanwhile, the write-off you book to clear the receivable does something on the corporate tax side that almost nobody warns free zone companies about — and it is the part that can cost real money.
Relief Only Gives Back VAT You Already Handed to the FTA
The statutory basis is Article 64(1) of Federal Decree-Law No. 8 of 2017 on Value Added Tax, explained in FTA Public Clarification VATP024, Adjustment on Account of Bad Debt Relief, issued on 17 March 2021.
The logic is narrow. When you issue a standard-rated tax invoice carrying 5% VAT, you must account for that output tax in the return for the relevant period and pay it to the FTA — whether or not the customer ever pays you. Bad debt relief undoes that one specific mismatch. It is a tax adjustment, not compensation for a lost commercial margin.
So the question a VAT bad debt relief UAE claim really turns on is never “did I lose money?” It is “did I pay output tax to the FTA on this supply?” If the answer is no, the relief mechanism yields nothing.
Four Conditions, and All Four Have to Hold
Article 64(1) sets out four cumulative conditions. Missing one invalidates the adjustment on audit.
| Condition | What it actually means | Where firms slip |
|---|---|---|
| Tax charged and accounted for | The goods or services were supplied and output VAT was declared and paid to the FTA in an earlier return; it does not mean the customer paid you | Claiming on zero-rated or out-of-scope supplies where no output tax was ever remitted |
| Written off in the accounts | The consideration has been written off, in full or in part, as a bad debt in the supplier’s accounts | Leaving the invoice sitting in receivables, or relying on a general doubtful-debt provision instead of a specific write-off |
| More than six months have passed | Six months measured from the date of supply | Counting from the invoice due date or from the date the debt was judged uncollectible |
| Customer notified | The supplier notified the customer of the amount of consideration written off | Sending nothing, or sending it and keeping no evidence that it went out |
Partial write-offs are allowed. Write off half the invoice and you reclaim the VAT on that half only.
Most Free Zone Invoices Never Generated the VAT You Are Trying to Reclaim
This is where free zone companies differ from mainland businesses reading the same clarification. Whether a supply carried output tax turns on the goods-versus-services distinction and on your zone’s status, which is covered in our guide to designated zone VAT rules. Services are generally within the scope of UAE VAT wherever the supplier sits, so a services-led free zone company usually has more reclaimable invoices than a trading company does.
| Type of supply | Typical VAT treatment | Bad debt relief available? |
|---|---|---|
| Services to a mainland UAE business | Standard-rated at 5% | Yes — output tax was paid, so it can be adjusted |
| Services to another free zone company in the UAE | Standard-rated at 5% in most cases | Yes — free zone status alone does not remove services from scope |
| Services to an overseas client | Zero-rated where the export-of-services conditions are met, otherwise 5% | Only on the 5% portion; nothing on a zero-rated invoice |
| Goods moved between designated zones | Out of scope where the designated zone conditions and documentation are satisfied | No — no output tax exists to adjust |
| Goods exported outside the UAE | Zero-rated with valid export evidence | No — nothing was declared, so nothing comes back |
Run your aged receivables through that filter before you budget for a recovery. On a trading book, the reclaimable slice is frequently a small fraction of the debt.
The Six-Month Clock Starts at the Date of Supply
The waiting period runs from the date of supply, not from the payment due date, not from the contractual terms, and not from the month your credit controller gave up. Under the Decree-Law, the date of supply is generally the earliest of delivery of the goods, completion of the services, or receipt of payment.
An invoice raised on 15 January for services completed on 10 January, on 90-day terms, has its clock start on 10 January. The six months are up on 10 July, regardless of the 15 April due date. Claiming earlier than that risks disallowance if the return is reviewed.
The Notification Is the Condition That Fails an Audit
Condition four is the one that most often collapses under scrutiny, because it is the only one that depends on an outbound communication rather than a ledger entry.
VATP024 accepts a letter, an email, post, or any similar communication stating the amount of consideration written off. The customer does not have to acknowledge or reply. But you must be able to evidence that the notification was sent, or that best measures were taken to notify. Practical documentation includes:
- A dated email to the customer’s finance contact, with the sent copy retained
- A letter sent by registered post or courier, with the delivery receipt kept on file
- A formal notice served through legal counsel where the relationship has already broken down
Whichever route you use, state the original tax invoice number and date alongside the amount written off. A notice that names an amount but not the invoice it belongs to is difficult to tie back to the adjustment two years later.
Your Customer Has a Reversal of Their Own to Make
The system is symmetrical. Article 55 of the Decree-Law requires a recipient who recovered input tax and then failed to pay the consideration within six months of the agreed date of payment to reverse that input tax, in the return for the tax period following expiry of the six months. If they settle later, they can recover it again.
So your write-off notification is not merely a courtesy. It lands on a customer who may already have carried a reversal obligation of their own — which is worth knowing before you decide how carefully to word it.
Writing Off the Debt Does Not Rescue Your QFZP De Minimis
Here is the part the generic bad debt articles skip, and the reason this matters far more than the 5% you are chasing.
Under Article 4 of Cabinet Decision No. 100 of 2023, a Qualifying Free Zone Person keeps its status only if non-qualifying revenue in a tax period stays within the lower of 5% of total revenue or AED 5,000,000. Which activities qualify, and which are excluded, are set out in Ministerial Decision No. 229 of 2025. Revenue attributable to a domestic or foreign permanent establishment, and certain immovable property revenue, sits outside both sides of that ratio and is taxed separately at 9%. Our guide to the Qualifying Free Zone Person rules covers the wider conditions.
The critical point: the de minimis test measures revenue, not profit. Revenue is recognised when you satisfy the performance obligation. A later default, and the write-off that follows it, is an expense in the income statement. It reduces taxable income. It does not un-earn the revenue, and it does not remove a single dirham from the numerator of the de minimis calculation.
Take a Dubai free zone consultancy with total revenue of AED 8,000,000 in the 2026 tax period. AED 7,600,000 is qualifying income from free zone clients; AED 400,000 is mainland UAE consultancy work, which is non-qualifying revenue. Its ceiling is the lower of 5% of AED 8,000,000 — that is AED 400,000 — and AED 5,000,000, so AED 400,000. The company is exactly on the line.
A mainland client then defaults on an AED 120,000 invoice carrying AED 6,000 of VAT. The consultancy writes the debt off and reclaims the AED 6,000. Its non-qualifying revenue for the de minimis test is still AED 400,000. Had it billed one more mainland invoice that period, it would have gone over.
The consequence of going over is not proportionate. Breach the de minimis and the company ceases to be a Qualifying Free Zone Person from the start of that tax period and for the four subsequent tax periods — five in total. Across those periods, all taxable income, including what would have been qualifying income, falls under the standard regime: 0% up to AED 375,000 and 9% above it. Recovering AED 6,000 of VAT while ignoring a AED 400,000 revenue ceiling is not a good trade.
The Corporate Tax Deduction and the VAT Claim Are Two Separate Filings
They are frequently spoken about as one action. They are not: different law, different trigger, different timing, different return. Both also assume you are registered and filing on time to begin with, which is covered in our guide to corporate tax registration deadlines and fines.
| Attribute | VAT bad debt relief | Corporate tax bad debt deduction |
|---|---|---|
| Legal basis | Article 64(1), Federal Decree-Law No. 8 of 2017; VATP024 | Federal Decree-Law No. 47 of 2022, applied to your accounting result |
| What triggers it | All four conditions met, including the customer notification | A specific receivable identified and written off in the accounts |
| Timing | Not before six months from the date of supply | The financial period in which the write-off is booked |
| Where it is reported | Box 1 of the VAT return, adjustments column, under the emirate of the original supply | The taxable income computation in the annual corporate tax return |
| What it gives back | The 5% output tax attributable to the written-off amount | A deduction against taxable income, worth 9% at the margin |
One further distinction on the corporate tax side: a specific bad debt that has been identified and written off is deductible. A general or blanket provision for doubtful debts, with no specific invoices identified, is not.
What the FTA Will Ask to See
Assemble the file at the time of the adjustment, not when the query arrives. For every VAT bad debt relief UAE claim, keep:
- The original standard-rated tax invoice, showing both TRNs, the tax charged and the date of supply
- The historical VAT return and payment evidence proving the output tax reached the FTA
- The general ledger entry showing the specific receivable written off, in full or in part
- A copy of the written notification to the customer, citing the invoice number, date and amount written off
- Proof that the notification was sent — email records, postal or courier confirmation, or counsel’s covering letter
- A short internal note reconciling the date of supply to the tax period in which the adjustment was taken
Frequently Asked Questions
Can I claim bad debt relief if my customer is in another free zone?
Yes, provided the original supply was standard-rated and you accounted for the output tax to the FTA. Services between UAE free zone entities are generally standard-rated, so they do qualify. The customer’s free zone status is irrelevant to the claim; what matters is whether 5% was charged and paid over.
What if the customer pays after I have claimed the relief?
The relief was an adjustment to output tax, so a later recovery has to be reversed. Account for the output tax on the amount recovered in the return for the period in which the payment arrives, and keep the trail linking it back to the original adjustment.
Is there a deadline to claim once the six months have passed?
The six months is a floor, not a window that expires the following month. In practice, take the adjustment in the return for the period in which all four conditions are first satisfied. Leaving it to sit makes the write-off harder to reconcile and keeps the claim exposed if records are later incomplete.
Does a bad debt write-off reduce my non-qualifying revenue for the QFZP de minimis test?
No. The de minimis test is applied to revenue, and revenue is recognised when the performance obligation is satisfied. The write-off is an expense against taxable income. Your non-qualifying revenue stays in the calculation at its original amount, so a default cannot pull you back under the threshold.
Can I claim relief on a zero-rated export invoice that went unpaid?
No. Relief only returns output tax previously accounted for and paid. A zero-rated export carries no output tax, so there is nothing to adjust. The loss is a commercial one, deductible for corporate tax if the receivable is specifically written off, but it produces no VAT recovery.
Do I need the customer to reply to my write-off notification?
No. VATP024 is explicit that no acknowledgement is required. What you do need is evidence that the notification was sent, or that best measures were taken to send it, so retain the sent email, the postal receipt, or the courier confirmation alongside the adjustment working.
This article is general guidance on UAE tax rules and is not tax advice. Legislation, cabinet decisions and public clarifications change; confirm your position against the FTA’s published legislation for the relevant tax period before filing.
Choosing the right zone shapes how much of your revenue is standard-rated, how much is qualifying, and how close you sit to the de minimis line. Explore UAE Freezone options today →