Starting October 1, businesses in the United Arab Emirates must adhere to new rules regarding value-added tax (VAT) refunds on employee benefits, following the implementation of Federal Tax Authority (FTA) Decision No. 17 of 2026. The decision establishes specific conditions under which companies can reclaim VAT paid on certain staff perks, including transport, accommodation, meals, phones, internet, and parking.
The updated regulations clarify which employee-related expenses are eligible for VAT recovery, aiming to distinguish between allowable work-related costs and personal benefits. While companies may continue to provide perks such as housing or transportation, they cannot automatically recover the VAT paid unless the expenses meet the criteria stipulated by the FTA. In cases where VAT recovery is disallowed, the tax becomes an additional cost borne by the employer rather than the employee.
Under the new framework, VAT reclamation applies only to six categories of employee benefits when they are provided under an employment contract or a written company policy. These categories and corresponding conditions are: staff transport limited to commuting between home and work or for other job duties with no personal use or cash alternatives allowed; meals provided to employees residing in remote locations lacking suitable cooking or dining options, without cash compensation; accommodation necessary for work obligations rather than as part of general salary packages, with temporary housing for new employees eligible for up to 30 days; work-related phones and internet requiring established company rules and monitoring of usage, allowing only minor personal use; and parking expenses connected to business duties, where approvals and payment records are mandatory.
Prior to this decision, the FTA’s guidance already restricted VAT claims on personal staff benefits, permitting deductions only for certain legally required or work-related provisions. However, this new decision provides clearer conditions and formalizes requirements such as written policies and monitoring systems, particularly for telecommunications benefits. Notably, the inclusion of home internet with allowance for limited personal use marks a departure from previous guidance, which mandated exclusive business use for VAT recovery on phone services.
The decision also introduces a separate rule targeting VAT claims on cash purchases exceeding limits set by ministerial decree, though the specific threshold has yet to be disclosed. This measure does not prohibit cash use but affects a company’s ability to recover VAT from such transactions.
Employers are advised to reassess their employee benefits policies, scrutinize documentation for VAT claims, and monitor usage of company-provided services to ensure compliance. While the ruling does not compel businesses to reduce benefits or allowances, companies may face significant unrecouped VAT costs, potentially amounting to hundreds of thousands of dirhams annually for larger employers, depending on their spending and adherence to the new conditions.
Overall, the changes emphasize the distinction between providing employee benefits and the tax implications of those perks, underscoring the importance of justified expenses, adequate record-keeping, and compliance with FTA regulations to optimize VAT recovery.