How is input VAT recovered when a business makes both taxable and exempt supplies?

Article 54 - Recoverable Input Tax 1. The Input Tax that is recoverable by a Taxable Person for any Tax Period is the total of Input Tax paid for Goods and Services which are used or intended to be used for making any of the following: a. Taxable Supplies. b. Supplies that are made outside the State which would have been Taxable Supplies had they been made in the State. c. Supplies specified in the Executive Regulation of this Decree-Law that are made outside the State, which would have been treated as exempt had they been made inside the State. 2. Where Goods are imported by a Taxable Person through another Implementing State and the intended final destination of those Goods was the State at the time of Import, then the Taxable Person shall be entitled to treat the Tax paid in respect of Import of Goods into the Implementing State as Recoverable Tax subject to the conditions specified the Executive Regulation of this Decree-Law. 3. Where Goods were acquired by a Taxable Person in another Implementing State and then moved into the State, the Taxable Person shall be entitled to treat the Tax paid in respect of the Goods in the Implementing State as Recoverable Tax subject to the conditions specified in the Executive Regulation of this Decree-Law. 4. A Taxable Person shall not be entitled to recover any Input Tax in respect of Tax paid in accordance with Clause 2 of Article 48 of this Decree-Law. 5. The Executive Regulation of this Decree-Law shall specify the instances where Input Tax is excepted from being recovered. Article 54 (bis)22 1. The Authority shall reject the deduction of the Recoverable Input Tax if it is established to the Authority that the supply subject to the deduction was part of a supply or a chain of supplies related to Tax Evasion, and the Taxable Person was aware of this relation upon deducting the Recoverable Input Tax. 2. The Authority may reject the deduction of the Recoverable Input Tax if it is 22 Article added as per Federal Decree-Law No. 16 of 2025. Federal Decree-Law No. 8 of 2017 and its amendments – As published by the Ministry of Finance 26 established to the Authority that the supply subject to the deduction was part of a supply or a chain of supplies related to Tax Evasion, and the Taxable Person should, based on circumstances of the supply, have been aware of this relation. 3. For the purposes of applying the provisions of Clause 2 of this Article, the Taxable Person shall be considered to have been required to be aware that the supply was part of a supply or a chain of supplies related to Tax Evasion, if he did not verify the validity and integrity of the supplies he receives before deduction of Input Tax, in accordance with the measures, procedures and conditions determined by the Authority in this regard.

are directly attributable to activities of the business that give rise to VAT recovery and expenses that are attributable to activities which do not allow for VAT recovery. Example 12 A law firm only provides services which are subject to VAT. The firm purchases new office desks for their employees. Since the desks will be used by the law firm for the purpose of conducting their taxable activities, the law firm will be able to recover the VAT incurred on the purchase of the desks. In certain circumstances, goods or services will be used partly in the course of making supplies that allow for the recovery of input tax and partly for making supplies for which VAT is not recoverable. Where an expense is used for making such mixed supplies, the taxable person must determine the portion of the input tax that can be recovered. 10.4. Input tax apportionment Input tax which is incurred in respect of goods or services which are used partly for making supplies that allow for VAT recovery and partly for making supplies for which VAT is not recoverable is known as “residual” or “overhead” input tax. This residual input tax must be apportioned between those activities. Recovery will be restricted to the proportion relating to supplies that allow for VAT recovery. In order to determine the proportion of recoverable residual input tax, a calculation must be performed to determine the extent to which purchases are used to make recoverable supplies. The percentage resulting from the calculation is then applied to the residual input tax to determine the actual amount of the input tax that can be recovered. 10.4.1. Input tax apportionment calculation In order to determine the value of input tax which is recoverable by the business, the taxable person should use the following default calculation: 1. Calculate the total value of input tax which is directly attributable only to supplies for which VAT may be recovered. 2. Calculate the total value of input tax which is directly attributable only to supplies for which VAT cannot be recovered. 3. Calculate the percentage to be applied to the residual input tax by dividing the total value of input tax identified under Step 1 by the sum of the input tax identified under Step 1 and Step 2. The percentage should be rounded to the nearest whole number. 36 VAT Guide | Taxable Person | VATG001

3. Overview of Input Tax apportionment 3.1. Introduction Persons conducting Business activities in the UAE incur VAT on Goods and Services, which is referred to as Input Tax. Registrants can recover Input Tax via the normal Tax Return process, subject to certain conditions being met. Consequently, VAT should, generally, not be a cost to a Registrant where such expenditure is incurred to make Taxable Supplies. However, where the Taxable Person is not able to recover the VAT incurred in respect of Goods or Services, the Person is, in effect, treated as the end consumer of those Goods or Services, and VAT becomes a cost to the Business. 3.2. Entitlement to recover Input Tax A Registrant is entitled to recover Input Tax incurred on the purchase of Goods and Services to the extent such Goods and Services are used, or intended to be used, in making any of the following:1 • Taxable Supplies, • supplies that are made outside the UAE which would have been considered taxable had they been made in the UAE, and • supplies of financial Services which would have been treated as exempt if made in the UAE, but which are provided to a Person who is outside the UAE at the time of the supply, and the Services are treated as taking place outside the UAE.2 A Taxable Person is entitled to full Input Tax recovery in respect of Goods and Services wholly used (or intended to be used solely) for any of the above purposes. In contrast, where the Goods or Services are used (or intended to be used) solely for non-business purposes or to make wholly Exempt Supplies, the Person will not be able to recover any of the Input Tax incurred. In certain circumstances, Goods or Services will be used partly in the course of making supplies that allow the recovery of Input Tax and partly for other purposes that do not allow Input Tax recovery. Where an expense is incurred for the making of such mixed supplies, the Taxable Person must determine the actual portion of the Input Tax on the expense that can be recovered. 1 2 Article 54(1) of the Decree-Law. Article 52(1) of the Executive Regulation. VAT Guide | Input Tax Apportionment | VATGIT1 8

Article 59 - Conditions and Mechanism of Input Tax Adjustment The Executive Regulation of this Decree-Law shall specify the conditions and mechanism for adjusting Input Tax in the following cases: 1. If the Taxable Person attributes the Input Tax, either fully or partially, to make Taxable Supplies, but changed the use, or the intended use, of those Goods or Services prior to making the Taxable Supplies. 2. If the Taxable Person attributes the Input Tax, either fully or partially, to make Exempt Supplies or for activities that do not fall within the conduct of Business, but changed the use or the intended use of the Goods or Services related to the Input Tax prior to making Exempt Supplies. Chapter Three – Capital Assets Scheme