On 14 July 2026, the Federal Tax Authority issued the Directive on Tax Transactions No. 4 of 2026, addressing a question that has generated inconsistent practice across the UAE insurance market — and kept financial advisory services in UAE fielding client queries — since VAT was introduced: when do the fees and charges levied under a life insurance or life reinsurance contract share the VAT exemption of the contract itself, and when are they separately taxable at 5%? The Directive answers with a two-layer test — a substance test drawn from composite supply principles, and a decisive pricing condition: the fee must be embedded in the premium, with no separate consideration charged.
Note: This Directive has not yet been published in the Official Gazette. Clause 6 provides for its publication in the Official Gazette, and its formal entry into effect follows that publication. Insurers and reinsurers should treat the position described below as imminent and review their fee structures now, while monitoring the Gazette for the publication date.
The legislative context
Under Article 46 of the VAT Law and Article 42 of the VAT Executive Regulation, the provision and transfer of ownership of life insurance and life reinsurance contracts is an exempt financial service. General (non-life) insurance, by contrast, is taxable at the standard 5% rate. Exemption carries its well-known double edge: no output VAT is charged, but input VAT attributable to the exempt supply is irrecoverable — a distinction tax consultants in UAE spend considerable time explaining to insurance clients.
What the legislation never spelled out is the treatment of the ecosystem of fees that surrounds a life policy in practice — policy administration fees, allocation and establishment charges, fund management charges on unit-linked products, endorsement and alteration fees, assignment fees on transfer of a policy, and the operational charges embedded in reinsurance arrangements. Insurers have taken varying positions: some treated everything under the policy as exempt; others charged 5% on any itemised fee. Directive No. 4 of 2026 now imposes a single framework.
The test: three substance conditions plus one decisive pricing condition
Clause 1 — the substance conditions. A service connected with a life insurance/reinsurance contract is treated as forming part of the exempt supply where all three of the following hold:
- the service is necessary for making the supply of the life insurance/reinsurance contract;
- the service is directly in connection with the provision, or transfer of ownership, of the contract; and
- the consideration for the service forms an integral part of the total consideration payable under the contract.
Practitioners will recognise this as the composite supply doctrine — the principle that ancillary elements follow the VAT treatment of the principal supply — applied specifically to life insurance, and anchored to Article 42 of the Executive Regulation.
Clause 2 — the pricing condition. Even where the substance conditions are met, the exemption applies only where the fees are included within the insurance premium and no separate consideration is charged for the service. This is the operative rule of the Directive, and it makes the VAT outcome turn on billing architecture:
- Fee absorbed into the premium, one consideration charged → follows the exemption.
- Same fee, functionally identical, but invoiced or charged separately → an independent supply, taxable at 5% (Clause 4).
In other words, substance gets a service to the door; pricing structure determines whether it walks through it. Two insurers providing identical policy administration can reach opposite VAT outcomes purely on how the charge is presented and collected.
Clauses 3 and 4 — the sorting rule. Fees relating to the management, operation, or execution of the contract, and similar services, can qualify for the exemption if the conditions are met. Services that are independent in nature, not essential or necessary to the contract, or for which separate amounts are charged, are independent supplies. Note the “or”: a separately charged amount is enough on its own to fall outside the exemption, even for an otherwise essential service.
Clause 5 — facts and circumstances. Classification is case-by-case, weighing the nature of the relationship between the service and the contract, the degree of necessity, and — again — the manner in which consideration is determined and charged. The repetition of the pricing factor in Clause 5 confirms it is not incidental drafting: how the fee is charged is central to the analysis.
Worked example
Facts. Falcon Life Insurance PSC issues a whole-of-life policy to a Dubai resident with an annual premium of AED 12,000. The policy involves an annual policy administration service which the insurer costs internally at AED 500, and the policyholder later requests an assignment of the policy to a bank as collateral, for which the insurer’s tariff provides a fee of AED 350.
| Scenario | Billing structure | VAT outcome |
|---|---|---|
| A — Fee embedded | AED 500 admin cost priced into single AED 12,000 premium; no itemised fee | Entire AED 12,000 exempt; no output VAT; related input VAT irrecoverable |
| B — Fee separately charged | AED 11,500 premium + separately stated AED 500 administration fee | Fee taxable: output VAT AED 25; tax invoice required; premium remains exempt |
| C — Assignment fee | AED 350 charged separately for assignment of policy to bank | Separately charged → taxable at 5% (AED 17.50) despite direct connection to transfer of ownership |
In Scenario C, the assignment relates to a transfer of ownership of the life policy — an activity expressly within the exempt supply under Clause 1 — yet the separate charging takes it outside the exemption. Insurers wishing to preserve exemption for such charges would need to restructure them into the premium, which for one-off transactional events is commercially awkward, and is precisely the kind of tension the Directive creates.
The aggregate lesson: the Directive rewards premium-inclusive pricing with exemption and penalises fee transparency with VAT — a structure insurers must now weigh against IFRS 17 presentation, pricing regulation, and customer disclosure expectations, ideally with input from vat advisory services in Dubai familiar with the insurance sector.
Gray areas that remain
Itemisation versus separate charging. Policy schedules and IFRS 17 disclosures routinely itemise charges (allocation rates, admin charges, mortality deductions) even where the policyholder pays a single premium. Is disclosure of a fee’s existence within a single premium “separate Consideration”? The better reading is no — Clause 2 turns on whether separate consideration is charged, not whether the pricing is transparent — but insurers should expect the FTA to probe structures where itemisation shades into separate collection.
Unit-linked charges. Fund management, allocation, and policy charges on unit-linked products are typically deducted from unit values rather than invoiced. Deduction-based charges are not obviously “included within the premium” nor obviously “separate consideration” — they sit between the Directive’s two categories. Given the size of the UAE unit-linked market, this is the single most consequential open question, and a public clarification addressing deduction mechanics would be welcome.
Surrender and early-exit charges. These arise on termination rather than provision of the contract and are collected by deduction from policy value. Whether they are consideration for any supply at all — or outside the scope of VAT as compensatory — is untouched by the Directive.
Mixed policies and riders. The Directive addresses fees and charges, not the distinct question of bundled non-life riders (critical illness, medical, personal accident) sold with life policies, which remain subject to the ordinary single-versus-multiple-supply analysis, with non-life elements taxable.
Reinsurance operational charges. Clause 3’s reference to management, operation, and execution fees extends to reinsurance — relevant for profit commissions, cedant administration charges, and fronting fees, which market practice has treated inconsistently. The same embedded-versus-separately-charged logic will now apply.
What insurers and reinsurers should do now
Before the Directive takes effect on Gazette publication, life insurers and reinsurers should map every fee and charge across their product suite against the four conditions; identify charges currently itemised or separately collected and decide, product by product, whether to restructure them into the premium (preserving exemption) or accept 5% VAT with tax-invoice and output-VAT compliance; re-run input tax apportionment models under each choice, since reclassifying fees from taxable to exempt reduces recovery; review policy documents, premium notices, and system billing logic so the paper trail matches the chosen treatment; and revisit reinsurance treaty wordings where cedant fees are separately stated.
How TSAC can help
TSAC, one of the tax advisory firms serving the UAE insurance sector, advises insurers, reinsurers, brokers, and TPAs on VAT classification of insurance products and fee structures, input tax apportionment methodologies, and FTA audit defence. The window between issuance and Gazette publication is the right time to restructure fee architecture — retrofitting after the first affected return means voluntary disclosures rather than design choices.
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.