Dubai: UAE businesses need to review how they claim VAT on employee expenses after rules that took effect on October 1 introduced specific conditions for staff transport, accommodation, meals, communications and parking.
The change affects whether employers can recover tax paid on those costs. For residents receiving company benefits, the decision does not itself reduce salaries, cancel allowances or require employers to withdraw accommodation or transport.
The distinction matters: a company may continue providing a benefit even when it cannot recover the associated VAT. In that case, the unrecovered tax becomes part of its cost.
Federal Tax Authority Decision No. 17 of 2026 sets conditions for six categories of benefits provided free to employees under a contractual obligation or documented company policy. The FTA issued the decision on September 9 and published it on its website on September 28, ahead of its October 1 implementation.
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How VAT recovery works
“Input VAT” means the VAT a business pays on its purchases. Subject to eligibility requirements, a VAT-registered company can deduct that tax from the VAT it owes on its sales.
For illustration, if a company buys a service costing Dh1,000 plus Dh50 VAT, recovering the Dh50 leaves an effective cost of Dh1,000. If the claim is blocked, the company bears the full Dh1,050.
That is why restrictions on recovery can increase operating costs without changing the supplier’s price. The financial impact depends on the VAT incurred and how much qualifies for recovery.
Employee spending was already subject to restrictions. Earlier FTA guidance generally blocked recovery on goods and services supplied free for employees’ personal benefit, while allowing exceptions, including qualifying legal obligations and work-related contractual arrangements.
What businesses must check
The new decision sets category-specific conditions for claims made through the employment-contract or company-policy route. The following are the main requirements; each category has its own eligibility conditions.
Staff transport: Must cover commuting or work duties, exclude personal use and offer no cash alternative.
Meals: Must meet remote-location conditions, including a lack of suitable cooking facilities or easily accessible food outlets, with no cash alternative.
Operational accommodation: Must meet work requirements rather than form part of ordinary compensation, with no cash alternative.
New recruits’ accommodation: Temporary accommodation can qualify for up to 30 days, subject to suitability requirements.
Phones and internet: Must support work, with only insignificant incidental personal use, documented rules and monitoring.
Parking: Must relate to business duties, with an approval policy and payment records.
For employers, the practical point is that recording a benefit in a contract or staff handbook does not, by itself, establish entitlement to recover VAT. The arrangement must satisfy the relevant conditions.
What was already required
The changes do not mean companies previously had unrestricted rights to recover VAT on employee meals, accommodation or other benefits. The earlier framework already distinguished personal benefits from qualifying employment-related costs.
Phone policies and monitoring are also not entirely new requirements. The FTA’s 2021 clarification on work phones, airtime and data required businesses to maintain documented restrictions, monitor usage and retain evidence of action against non-compliance.
That guidance also required valid tax invoices and company details on the relevant invoices and telecommunications contracts. It said backdated policies would not be accepted.
The new decision expressly addresses home internet and permits incidental, insignificant personal use under its conditions. Businesses should distinguish those current provisions from the older guidance’s requirements for solely business use.
Not the whole framework
The six-category decision applies to a particular route for recovering VAT on employee benefits. It does not replace every separate provision governing employee-related claims.
The amended executive regulation retains provisions for qualifying benefits required by applicable labour legislation. For accommodation, that route specifically requires the employer’s obligation to arise under Ministry of Human Resources and Emiratisation decisions or directives.
A separate provision covers employee health insurance, including enhanced cover, and specified family members: a husband or one wife, and three children younger than 18. Those claims remain subject to the applicable framework.
Separate cash provision
Another amendment provides for blocking input VAT recovery where a purchase exceeds an amount specified by ministerial decision and payment is made, or intended to be made, in cash.
The executive regulation does not itself state the numerical threshold. This provision concerns a business’s entitlement to recover VAT. It does not, by itself, prohibit residents from paying cash for everyday purchases.
Effect on employees, costs
For residents, the immediate distinction is between receiving a benefit and the employer’s tax treatment of that benefit. A rejected VAT claim does not itself cancel company accommodation, a transport service or an agreed phone allowance.
Employers may review policies, seek clearer supporting documents or reassess the cost of existing arrangements. Those are possible business responses, rather than benefit cuts required by the VAT decision.
Additional annual costs could reach hundreds of thousands of dirhams for some large employers, tax experts estimate. That is a conditional estimate, not a standard charge: the impact depends on the company’s spending and the amount of VAT that becomes ineligible.
A useful review starts with the actual benefit supplied, the basis for providing it and the evidence supporting the claim. Businesses can then identify which expenses remain recoverable, which require stronger documentation and which leave VAT as an operating cost.