On 20 July 2026, the Federal Tax Authority issued the Directive on Tax Transactions No. 5 of 2026, prescribing — for the first time — a method for determining the value of Deemed Supplies of Services under Article 37 of the VAT Law. Article 37 has always said the value of a deemed supply is the total cost incurred to make it. For goods, cost is usually observable. For services, it never was: what is the “cost” of a service given away free, when its inputs are a blend of staff time, overheads, licences, and purchased services — some carrying input VAT, some not? The Directive answers with a four-step mechanism that starts from open market value and works backwards — stripping out profit, then isolating only the proportion of costs that carried input tax.
Note: This Directive has not yet been published in the Official Gazette. Clause 4 provides for its publication in the Official Gazette, and its formal entry into effect follows that publication. Taxable persons making deemed supplies of services should review their valuation approach now, while monitoring the Gazette for the publication date.
The context: deemed supplies and the Article 37 problem
Deemed supplies exist to protect the VAT base: where a taxable person recovered input tax on goods or services and then applies them to non-business use, gives them away without consideration, or provides them to staff for personal benefit, Articles 11 and 12 of the VAT Law deem a supply to occur so the recovered input tax is effectively clawed back through output tax. The familiar de minimis reliefs still apply — no deemed supply where input tax was not recovered, and the thresholds for low-value gifts (AED 500 per recipient per twelve months) and the AED 2,000 cap on total deemed-supply output tax per twelve months take many small cases out of scope entirely — testing that scope is a task vat consultancy services in Dubai handle routinely for clients with related-party or staff-benefit arrangements.
For those within scope, Article 37 sets the value at the total cost incurred to make the deemed supply. Services broke this rule in practice. Unlike a crate of goods with a purchase invoice, a free service — a marketing campaign done gratis for a related business, professional services provided to an owner personally, software access given to staff — draws on a cost pool nobody tracks at supply level. Taxpayers improvised: some used market value (overstating, since Article 37 says cost, not price), some used direct costs only (understating), most documented nothing. The Directive replaces improvisation with formula.
The four-step mechanism
Step (a) — start with open market value. Determine the open market value (OMV) of the services constituting the deemed supply; where the OMV of those services cannot be determined, use the OMV of comparable services. This is the anchor: rather than asking the business to cost the service bottom-up, the FTA starts from what the service would fetch between unconnected parties.
Step (b) — strip out profit.
Estimated total cost = OMV ÷ (1 + net profit margin)
The net profit margin comes from the taxable person’s own financial statements for the preceding financial year; where it cannot be determined (a first-year business, for instance), the average net profit margin prevailing in the sector may be used.
Step (c) — measure the input-taxed share of the cost base. Calculate, from the previous financial year, the percentage that costs bearing input tax represent of the taxable person’s total costs. Salaries, depreciation, financing costs, and other VAT-free costs sit in the denominator but not the numerator — so this ratio is always below 100% for any business with employees.
Step (d) — apply the ratio.
Value of deemed supply = estimated total cost × input-taxed cost percentage
Clause 3 confirms this figure is the Article 37 value; output tax at 5% follows.
The design logic deserves a sentence of appreciation: because deemed supplies exist to reverse recovered input tax, the Directive deliberately excludes the salary-and-depreciation share of cost from the taxable value. A pure market-value approach would have taxed value the business never recovered VAT on. The four-step method is therefore structurally taxpayer-favourable relative to OMV — the value can never exceed OMV and will usually sit well below it.
Worked example
Facts. Meridian Marketing LLC, VAT-registered in Dubai and advised by a tax consultant in Dubai on its ongoing compliance, produces a complete brand-launch campaign free of charge for a restaurant owned by its shareholder’s brother (a related party outside any tax group, with no consideration payable). Meridian recovered input tax on its cost base in the ordinary course. Comparable agencies charge AED 100,000 for an equivalent campaign. Meridian’s audited financial statements for the preceding year show a net profit margin of 20%; its cost ledger for that year shows total costs of AED 8,000,000, of which AED 6,000,000 carried input VAT (the balance being salaries and other VAT-free costs).
| Step | Computation | Result |
|---|---|---|
| (a) Open market value | Comparable agency pricing for equivalent campaign | AED 100,000 |
| (b) Strip profit | 100,000 ÷ (1 + 0.20) | AED 83,333 |
| (c) Input-taxed cost ratio | 6,000,000 ÷ 8,000,000 | 75% |
| (d) Deemed supply value | 83,333 × 75% | AED 62,500 |
| Output tax | 62,500 × 5% | AED 3,125 |
Note the distance travelled: a naïve market-value approach would have produced output tax of AED 5,000; the prescribed method produces AED 3,125 — a 37.5% reduction attributable to the profit strip and the VAT-free cost exclusion, with the full computation retained on file.
Observations and gray areas
The margin formula is a markup formula. Dividing OMV by (1 + margin) is mathematically the way to strip a markup on cost; a net profit margin in financial statements is conventionally expressed on revenue. Feed a revenue-based margin into a markup formula and the resulting “cost” is slightly overstated (in our example, a 20% revenue margin implies a true cost of AED 80,000, not 83,333 — the formula concedes a modestly higher deemed value). The Directive plainly intends the FS-derived margin to be plugged into the formula as written, and the divergence is small at typical margins — but taxpayers should apply the formula literally rather than “correcting” it, and document the margin computation transparently.
Loss-making taxpayers. A negative net profit margin makes the divisor less than one and inflates the estimated cost above OMV — an odd result the Directive does not address. Whether a loss-maker should treat its margin as “not determinable” and fall back on the sector average is unstated; that reading produces the more sensible outcome and is the position we would document.
What is the “sector average” and where does it come from? The Directive names no source. Central Bank publications, listed-company sector data, and industry-body statistics are candidates; financial advisory services in UAE typically maintain their own sector benchmarks for exactly this purpose; in practice the choice should be documented, consistent year to year, and defensible on audit.
Which financial statements? The mechanism keys off the “preceding financial year,” which for most businesses means the last completed FS. Deemed supplies occurring early in a year — before that FS is finalised — raise a practical sequencing question the Directive leaves open; using the most recently available statements, consistently, is the defensible approach.
Comparability. Step (a)’s fallback to “comparable services” imports a transfer-pricing-style comparability exercise into VAT. For bespoke services with no observable market — internally developed software given to a related party, for example — the OMV determination will be the contested step, and the working papers should show how the comparable was selected.
Scope discipline. The Directive governs deemed supplies of services only. Deemed supplies of goods remain valued at actual total cost under Article 37 without this mechanism, and the Article 12 exceptions and thresholds are untouched — always test whether a deemed supply arises at all before valuing it.
What businesses should do now
Taxable persons that provide free services to related parties, staff, or others should: map recurring free-service arrangements and test them against Articles 11 and 12 (including the AED 2,000 annual output-tax threshold) to confirm which are genuinely deemed supplies; compute and document the two standing inputs the mechanism needs each year — the FS-derived net profit margin and the input-taxed cost ratio — so valuations are mechanical when a deemed supply arises; benchmark OMV sources for services habitually given away; revisit historic deemed-supply valuations, since positions based on full market value may now be overstated and positions based on direct cost only may be understated; and retain the full four-step computation with each affected return.
How TSAC can help
TSAC, among the tax advisory firms assisting UAE businesses with this Directive, helps with deemed supply identification, the Article 37 valuation mechanics under this Directive, OMV benchmarking, and documentation that stands up to FTA audit. The mechanism rewards businesses that prepare their margin and cost-ratio inputs in advance — and penalises, through contested valuations, those that construct them after the event.
This publication is for general information only and does not constitute tax advice. At the date of writing, the Directive has not yet been published in the Official Gazette. The Arabic text of the Directive prevails over any translation. Please contact TSAC for advice specific to your circumstances.