On 8 July 2026, the Federal Tax Authority issued the Directive on Tax Transactions No. 2 of 2026, resolving one of the most persistent operational questions in UAE VAT group practice — and one vat consultants in Dubai field often: when a member exits a Tax Group and a credit note, price reduction, or expense adjustment later arises on a transaction from its group-membership period, who accounts for the adjustment — the group it left, or the departed member itself? The Directive’s answer: the departed Registrant makes the adjustment in its own Tax Returns, even though the original supply or expense was declared in the Tax Group’s returns under the representative member’s TRN.
Effective date: The Directive is published in the Official Gazette and takes effect from 1 August 2026 (Clause 4). Group exits completed — and separations being negotiated — should be reviewed against it now.
The existing framework: what already happens when a member leaves
To see what the Directive changes, it helps to restate what the law already provides.
Under Article 14 of the VAT Law and Articles 9–10 of the Executive Regulation, a Tax Group is treated as a single taxable person: the representative member files one consolidated return under the group TRN, intra-group supplies are disregarded, and all members are jointly and severally liable for group tax obligations arising during their membership. A member leaves the group — voluntarily or compulsorily — when the control or related-party conditions cease to be met, on a sale of the subsidiary, on group restructuring, or by FTA direction. On exit, if the departing member continues to make taxable supplies above the threshold, it holds (or reactivates) its own VAT registration and files its own returns from the exit date — a transition many businesses coordinate with vat advisory services in Dubai to avoid gaps in registration continuity.
The general adjustment machinery is also long-established: Article 61 of the VAT Law requires output tax to be adjusted where a supply is cancelled, the consideration changes, or goods are returned; Article 62 requires a credit note; and input tax previously recovered must be given back where the underlying expense is reduced. What none of these provisions addressed is the temporal mismatch created by a group exit: the transaction was reported by one taxable person (the group), but the adjustment event crystallises after the supplier or recipient has become a different taxable person (the departed member under its own TRN). Practice diverged — some groups kept adjusting through the representative member on the logic that the group made the original declaration; others pushed adjustments to the departed entity; many separation agreements were silent.
What the Directive decides
Clause 1 — the adjustment follows the person. Where a person ceases to be a member of a Tax Group but remains a Registrant, adjustments relating to taxable supplies it made, or taxable expenses it incurred, before leaving the group must be made in its own Tax Returns — provided those supplies or expenses were previously declared in the Tax Group’s returns. The economic owner of the transaction, not the TRN under which it was first reported, carries the adjustment.
Clause 2 — the two covered directions. Adjustments “shall include”: reductions in the value of taxable supplies previously declared in the group’s returns (the departed member reduces its output tax in its own return), and reductions in taxable expenses for which input tax was recovered through the group’s returns (the departed member repays the input tax in its own return). The word “include” indicates the list is illustrative rather than exhaustive — upward adjustments (additional consideration, debit notes) are not named, but the Clause 1 principle is broad enough to carry them on the same person-based logic.
Clause 3 — the evidentiary bridge. The Registrant must retain supporting documents and records proving that the adjustment relates to supplies or expenses previously declared in the group’s returns. This is the operationally demanding clause: the departed member must be able to trace its own transactions inside consolidated group returns it did not file — which makes data handover at exit a compliance requirement, not a courtesy.
Worked example
Facts. Alpha Trading LLC is a member of the Tariq Holding Tax Group until 30 June 2026, when the holding company sells it to a third party. Alpha retains its own VAT registration from 1 July 2026. Two group-era transactions later move:
| Leg | Group-era transaction (declared in group returns) | Post-exit adjustment (Directive outcome) |
|---|---|---|
| 1 — Output side | May 2026: equipment sold for AED 1,050,000 incl. AED 50,000 output tax; declared in group May return | Sep 2026: 20% returned; credit note AED 210,000 incl. AED 10,000 VAT — Alpha reduces output tax by AED 10,000 in its OWN September return |
| 2 — Input side | Jun 2026: marketing costs AED 315,000 incl. AED 15,000 input tax; recovered via group June return | Oct 2026: supplier credit note reduces charge 40% — Alpha repays AED 6,000 input tax in its OWN October return |
The commercial wrinkle. Notice the cash asymmetry: in Leg 1 Alpha receives a VAT benefit (AED 10,000) for tax the group originally remitted; in Leg 2 Alpha suffers a VAT cost (AED 6,000) for a recovery the group originally enjoyed. The Directive settles the compliance mechanics but not the economics — which is precisely why share purchase agreements and separation deeds for group exits should now contain VAT adjustment clauses, ideally drafted with input from vat consultancy services in Dubai: an obligation on both sides to notify group-era adjustment events, an indemnity or settlement mechanism transferring the economic effect to the party that bore or enjoyed the original tax, and a data-access covenant satisfying Clause 3.
Gray areas and observations
The exiting member that deregisters. Clause 1 applies where the person “remains a Registrant.” An exiting member that falls below the threshold and deregisters is outside the Directive’s words. Whether group-era adjustments then revert to the representative member, or are simply lost, is unaddressed — relevant for wind-downs and post-sale dormancy.
Credit note mechanics across TRNs. The original tax invoice was issued under the group TRN; the post-exit credit note issues under the member’s own TRN. The Directive does not prescribe how the credit note should cross-reference an invoice bearing a different TRN. Until clarified, credit notes should reference the original invoice number and date, state that the supply was made while the supplier was a member of the named Tax Group, and be supported by the Clause 3 trail.
Bad debt relief on group-era receivables. Article 64 relief (unpaid consideration written off after six months) is a distinct mechanism from a value reduction, and the Directive does not name it. The person-based logic points to the departed member claiming relief on its own receivables — but the Article 64 conditions were drafted for a single continuing registrant, and their application across a group exit deserves express FTA confirmation.
Joint and several liability continues. Nothing in the Directive disturbs the rule that a former member remains jointly and severally liable for group obligations arising during its membership. Exit does not launder group-era exposure; the Directive adds a forward-looking compliance duty on top of it.
The 1 August 2026 effective date. Adjustment events crystallising on or after 1 August 2026 fall squarely within the Directive. For credit notes issued between a member’s exit and that date, the prior (unsettled) practice governs — entities that adjusted through the representative member in that window should document the basis and hold position papers, since the FTA’s direction of travel is now clear.
What businesses should do now
Groups and recently-departed members should, before 1 August 2026: inventory open commercial positions of any departed or departing member — return rights, volume rebates, price-adjustment clauses, disputed invoices — that could generate adjustments on group-era transactions; build the Clause 3 evidence pack at exit (transaction-level extracts of the member’s supplies and expenses as declared in each group return, with invoice registers); insert VAT adjustment, notification, settlement, and data-access clauses into SPAs and separation agreements for group exits; align systems so post-exit credit notes correctly reference group-era invoices; and brief both the representative member and the departed entity on who books what — double-adjustment (both entities claiming the same output tax reduction) is now the audit risk to design against.
How TSAC can help
TSAC, one of the tax advisory firms based in Dubai, advises on VAT group formation, restructuring, and exit — including adjustment mechanics, separation agreement VAT clauses, evidence-pack design, and representation before the FTA. If a group exit is on your transaction pipeline, the VAT workstream now extends well beyond deregistration forms — and the Directive’s effective date of 1 August 2026 is weeks away.
This publication is for general information only and does not constitute tax advice. The Arabic text of the Directive prevails over the English translation. Please contact TSAC for advice specific to your circumstances.