UAE Tax Law 2025–26 — Key Procedural Reforms and What They Mean for Businesses

A Significant Restructuring of UAE Tax Procedures Is Underway

Federal Decree-Law No. 17 of 2025 rewrites substantial parts of the UAE Tax Procedures Law — formally Federal Decree-Law No. 28 of 2022 — as part of the country’s broader push to modernize its tax administration, sharpen clarity, and align more closely with international standards. The reforms take effect from 1 January 2026 and reach across VAT, excise tax, and Corporate Tax alike, touching how refunds work, how voluntary disclosure operates, and how the FTA conducts audits and assessments.

This guide sets out exactly what changed, why it changed, and what it means in practice for businesses operating in the UAE — including the parallel reforms to VAT law and the unified penalty framework that arrived alongside this procedural overhaul.

What the Amendments Are Trying to Achieve

The reforms are built around four connected goals:

• Clearer statutory limitation periods for tax refunds and credit balances, replacing what had previously been an open-ended position
• Streamlined voluntary disclosure rules, reducing compliance effort spent on corrections that don’t actually change the tax due
• Stronger FTA capability and procedural protection, giving the Authority clearer tools to act on legitimate concerns
• Greater consistency and predictability across the different tax regimes businesses in the UAE deal with simultaneously

The Five-Year Refund and Credit Balance Deadline

The single most consequential change in Federal Decree-Law No. 17 of 2025 is the introduction of a firm five-year deadline on claiming a tax refund or using a credit balance to settle a tax liability.

Under the amended law, a taxpayer must submit a refund request, or use the credit balance, within five years of the end of the period in which the credit accrued. Once that window closes, the right to the refund or credit lapses entirely — there is no residual claim to fall back on. This replaces a previous position where no clearly defined statutory deadline existed at all, which had left genuinely old, unresolved claims sitting in an uncertain legal position for both taxpayers and the FTA.

A transitional rule softens the impact for credits that already existed before the new regime began: taxpayers holding credit balances accrued before 1 January 2026 have a window of one year from that date to file their claims, preventing the new five-year rule from retroactively extinguishing entitlements that were already close to, or past, what would have been a reasonable claim period under the old, undefined system.

The parallel VAT-specific version of this rule, introduced through Federal Decree-Law No. 16 of 2025 and also effective from 1 January 2026, applies the same five-year logic to excess recoverable input VAT — amending Article 74(3) of the VAT Law so that unused input VAT credit can no longer be carried forward indefinitely. Critically, it is the act of submitting a refund request, or using the credit to offset a VAT liability, that preserves the right — not whether the FTA has actually processed or paid the refund within that window. Businesses holding VAT credits that originated as far back as 2021 should treat reviewing those balances as an immediate priority, since under the standard rule those specific balances are among the first that risk lapsing during the 2026 transition. Separately, where a five-year period has already expired, or is due to expire within a year of 1 January 2026, transitional relief allows outstanding claims to be submitted up to 31 December 2026.

Changes to Voluntary Disclosure

The amendments meaningfully narrow when a formal Voluntary Disclosure is actually required, replacing a broader, less defined obligation with a more targeted one.

• Voluntary disclosure is now reserved for errors or omissions specifically identified by the FTA as having a material effect on the tax payable or refundable
• Corrections that don’t affect the amount of tax due can instead be made directly within the next tax return, without triggering a formal VD process
• The FTA retains the ability to issue further guidance clarifying which categories of error require disclosure and which can be handled through routine adjustment

The practical effect is to remove a category of disproportionate compliance burden — businesses no longer need to run a full voluntary disclosure process for an error that, however technically incorrect, never actually changed what was owed — while keeping the FTA’s oversight intact precisely where it has genuine financial consequence.

Audit, Assessment, and Limitation Period Changes

The amended Tax Procedures Law also adjusts how audits and assessments interact with the statutory limitation period. In specific circumstances — for example, where a refund request is submitted late but still within the broader statutory window — the FTA retains the power to conduct an audit or issue an assessment beyond what would otherwise be the standard limitation period, provided the action stays within the law’s defined scope.

Alongside this, the FTA has been given clearer authority to issue official, binding guidance intended to harmonize how the law is interpreted and applied, reducing the inconsistency that can arise when similar situations are handled differently by different officers or departments. Transitional provisions also extend certain deadlines for taxpayers whose refund rights fall due around the new law’s effective date, balancing the certainty the new five-year rule introduces against the practical difficulty of adjusting overnight.

The Unified Penalty Framework — Cabinet Decision No. 129 of 2025

Alongside the procedural reforms, the UAE Cabinet adopted Cabinet Decision No. 129 of 2025, establishing a single, harmonized penalty framework spanning VAT, excise tax, Corporate Tax, and the Tax Procedures Law itself. These changes take effect from 14 April 2026.

The unified framework is built around three goals: simplicity and predictability, replacing a more complex, compounding penalty structure with straightforward, generally lower fixed amounts for common violations; consistency across tax types, so that comparable compliance failures are treated the same way regardless of whether they arise under VAT, excise, or Corporate Tax; and encouraging voluntary compliance, on the basis that taxpayers who understand the penalty structure clearly are more likely to self-correct proactively.

Key Penalty Changes

• Late payment penalty — a flat 14% per annum, calculated monthly on outstanding tax, replaces the former tiered, interest-like penalty structure
• Reduced administrative sanctions for lower-stakes violations, such as failing to provide information in Arabic or failing to update tax documentation promptly — the new fixed amounts for these are substantially lower than before
• Harmonized definitions for terms such as tax audit, tax difference, and due tax, applied consistently across VAT, excise, and Corporate Tax rather than varying subtly between regimes
• Expanded liability for legal representatives and tax agents, with the new framework defining and, in some cases, broadening their responsibility where a compliance breach occurs under their representation

This framework builds directly on the foundation laid by Cabinet Decision No. 75 of 2023, refining its calculation methods and definitions rather than replacing the underlying structure outright — the goal is a more consistent, predictable set of enforcement standards across every major UAE tax regime simultaneously.

The Domestic Minimum Top-Up Tax and OECD Pillar Two

In line with the international framework set out under the OECD’s Pillar Two / GloBE rules, the UAE has introduced a Domestic Minimum Top-Up Tax (DMTT) to ensure large multinational enterprise groups maintain an effective tax rate of at least 15% on their profits.

• 15% minimum tax — applies where a group’s effective tax rate in the UAE falls below this threshold
• Scope and threshold — the DMTT applies to multinational groups with consolidated annual revenue of at least €750 million, in line with the threshold used under the broader GloBE rules internationally
• Integration with standard Corporate Tax — the DMTT runs alongside the existing 0%/9% Corporate Tax framework as a separate calculation, requiring coordinated tax planning for any group within its scope rather than treating the two regimes in isolation

VAT Law Amendments Affecting Multinational and Domestic Groups Alike

The 2026 VAT Law amendments under Federal Decree-Law No. 16 of 2025 introduce several changes relevant well beyond multinational groups specifically.

Simplified Reverse Charge Reporting

Taxpayers applying the reverse charge mechanism for imported goods or services are no longer required to issue a self-invoice to themselves to record the VAT due. Instead, they must retain standard supporting documentation — supplier invoices, contracts, and related transaction records — as evidence of the supply. This removes a layer of duplicate paperwork that previously added little beyond what customs declarations or supplier invoices already captured.

The Five-Year VAT Refund Cap

Consistent with the broader procedural reform described above, excess recoverable input VAT can now only be carried forward or claimed within five years of the end of the tax period in which it arose, rather than indefinitely as the previous rules allowed.

Stricter Input VAT Deduction Conditions

A new provision specifically targets supply chains connected to tax evasion. The FTA can now deny input VAT recovery where a transaction forms part of a supply, or chain of supplies, linked to tax evasion — not only where the taxpayer actually knew about the connection, but also where the taxpayer reasonably should have known based on the circumstances and failed to exercise adequate due diligence. In practice, this introduces something close to a “know-your-supplier” obligation: businesses are expected to verify the legitimacy and integrity of their suppliers before claiming input tax, rather than relying solely on the face validity of an invoice.

Practical Steps Businesses Should Take Now

• Audit existing credit balances by originating tax period, with particular urgency for balances dating to 2021 or earlier, since these are closest to lapsing under the new five-year rule
• Submit outstanding refund claims before 31 December 2026 where a five-year period has already expired or is due to expire within a year of the new rule taking effect
• Review internal error-correction procedures to align with the narrower voluntary disclosure scope, distinguishing material errors requiring formal VD from immaterial ones correctable through a routine return
• Strengthen supplier due diligence processes, given the FTA’s expanded ability to deny input VAT recovery based on a “should have known” standard rather than actual knowledge alone
• Update internal documentation practices for reverse-charge transactions, replacing the self-invoicing process with proper retention of supplier invoices and contracts
• Reassess penalty exposure against the new flat 14% late payment rate and the harmonized administrative sanctions taking effect from 14 April 2026

Frequently Asked Questions (FAQs)

What is the five-year rule introduced by Federal Decree-Law No. 17 of 2025?

The five-year rule requires taxpayers to submit a refund claim or use a tax credit balance within five years of the end of the period in which it accrued. After this window closes, the right to the refund or credit lapses permanently.

What transitional relief is available for credit balances that existed before 2026?

Taxpayers with credit balances accrued before 1 January 2026 have one year from that date to file their claims. Separately, where a five-year period has already expired or is due to expire within a year of 1 January 2026, outstanding claims may still be submitted up to 31 December 2026 under transitional relief.

How have voluntary disclosure requirements changed in the UAE?

Voluntary disclosure is now limited to errors or omissions the FTA identifies as having a material effect on the tax payable or refundable. Corrections that don’t change the amount of tax due can be made directly in the next tax return rather than through a formal disclosure process.

What is changing under the unified penalty framework from April 2026?

Cabinet Decision No. 129 of 2025, effective 14 April 2026, introduces a flat 14% per annum late payment penalty in place of the previous tiered structure, reduces administrative sanctions for lower-stakes violations, harmonizes tax-related definitions across VAT, excise, and Corporate Tax, and expands liability for legal representatives and tax agents.

What is the Domestic Minimum Top-Up Tax and who does it affect?

The DMTT ensures multinational enterprise groups with consolidated annual revenue of at least €750 million maintain an effective tax rate of at least 15% in the UAE, in line with the OECD’s Pillar Two framework. It applies alongside, rather than instead of, the standard Corporate Tax regime.

Do businesses still need to issue self-invoices under the reverse charge mechanism?

No. From 1 January 2026, businesses applying the reverse charge mechanism for imports no longer need to issue a self-invoice. They must instead retain standard supporting documentation, such as supplier invoices and contracts.

Can the FTA deny input VAT recovery if a business didn’t know about a supplier’s tax evasion?

Yes, in certain circumstances. The FTA can deny input VAT recovery where a transaction is linked to tax evasion and the taxpayer either knew or reasonably should have known about the connection, based on whether adequate due diligence was carried out on the supplier and transaction.

How Farahat & Co. Can Help

This round of reforms touches refund timelines, disclosure procedures, audit powers, and penalty calculations simultaneously, which makes a coordinated review of internal tax processes considerably more valuable than addressing each change in isolation. Farahat & Co. supports businesses across the UAE in reviewing existing credit balances, updating voluntary disclosure procedures, and preparing for the unified penalty framework and VAT amendments taking effect through 2026.

Contact Farahat & Co. today to assess how these reforms affect your business.