UAE VAT Amendments Restrict Input Tax Recovery on Employee-Related Business Expenses

Companies operating in the United Arab Emirates across sectors including manufacturing, construction, retail, hospitality, and logistics are reassessing operational costs, staff contracts, and tax claims following revisions to the country's value-added tax (VAT) framework, The Economic Times reported. The regulatory amendments narrow the scope for businesses to recover input VAT on employee expenditures.

The detailed conditions issued by the Federal Tax Authority (FTA) were published on September 28 and took effect on October 1, leaving companies three days to revise existing arrangements. International tax advocate Priyanshi Chokshi stated that businesses face uncertainty over the implementation, noting that a key threshold restricting input tax recovery on cash-paid purchases remains to be specified by the UAE Ministry of Finance.

The revised framework limits input VAT recovery to six specific categories of employee-related expenses: certain transportation costs, food and beverages at remote locations, operational accommodation, temporary accommodation for new hires, mobile phones and internet services, and work-related parking. Under earlier provisions, businesses could recover VAT on general employee food and services, whereas meals must now satisfy remote-location criteria. Recovering VAT on staff telephony and internet expenses may require a written usage policy, proof of monitoring, and records of non-compliance.

While the rules apply to all commercial entities in the UAE, the report highlighted significant exposure among Indian-owned businesses, which comprise approximately 20% to 25% of all UAE firms with over 265,000 registered as of June 2025. Tax experts warned that labour-intensive firms could face annual additional costs running into hundreds of thousands of dirhams if substantial workforce-related expenditures no longer qualify for input tax recovery.