The UAE’s VAT system is set for a major update effective 1 January 2026 under FTA Decision No. 9 of 2025 on the Conditions to Decline the Refund of Residual Amounts. This amendment introduces a statutory five-year limitation period for claiming or utilising VAT credit balances from previous tax periods. Failure to act before the deadline could result in significant financial loss for many businesses.
This article provides a detailed analysis of the new limitation period, highlights practical implications for business operations, and outlines proactive steps to mitigate risks before the rule’s enforcement.
Understanding the New VAT Refund Limitation Rule
The new rule introduces a clear timeline for VAT recovery, aligning UAE tax practices with global standards and reducing uncertainty for businesses. To help businesses understand the practical effects of this reform, the following key amendments explain how the new 5-year limitation affects VAT refund claims and the Federal Tax Authority’s review process:
- Taxpayers now have a maximum of five years from the end of the relevant tax period to apply for a refund of any VAT credit balance. After this period, the right to claim the refund expires permanently.
- Refund requests submitted in the 5th (final) year will be subject to extended audit rights by the Federal Tax Authority (FTA), allowing the authority to review documentation beyond the usual limitation period due to the increased risk linked to older claims.
- Where a refund arises after the five-year period or within 90 days before expiry, businesses may still submit a refund request. However, such claims are expected to face closer and more detailed scrutiny from the FTA.
This change emphasizes the need for stronger VAT governance and proactive credit management, particularly for businesses holding historic balances.
How the New Rule Works
Each VAT credit is now linked to a fixed expiry date calculated from the tax period it was incurred. The rule applies universally to all types of recoverable input VAT, whether arising from purchases, zero-rated exports, or capital investments.
To illustrate:
A VAT credit created in the tax period ending 31 March 2021 must be claimed or utilised by 31 March 2026. Failure to do so will result in automatic forfeiture of that credit.
Understanding the operational mechanics of this limitation allows businesses to prioritise their refund claims effectively and prevent loss of recoverable VAT.
Key Implications for Businesses
The introduction of a five-year limitation imposes several challenges and necessitates strategic VAT management:
Expiry of Older VAT Credits
Companies holding legacy VAT credit positions, especially those dating to the early VAT implementation period, must confront the risk of irreversible loss of recoverable tax, impacting profitability and working capital.
Impact on Cash Flow
The limitation creates an urgency to convert dormant credits into cash or liability offsets. Delays or inaction could tighten cash flow and disrupt financial planning.
Heightened Importance of Reconciliation and Documentation
Accurate VAT reconciliation supported by comprehensive and compliant documentation is a critical control to substantiate refund claims and withstand potential FTA scrutiny.
Increased FTA Scrutiny on Historic Claims
Refund applications spanning older tax periods are expected to be subject to intensified review, underscoring the importance of well-organised records and audit-ready evidence.
Documentation Required to Support Refund Claims
Businesses must ensure that all input VAT claims are substantiated with complete and audit-compliant documentation. This includes, but not limited to:
- Properly issued tax invoices that meet FTA standards
- Import and export customs declarations confirming transaction legitimacy
- Verified payment evidence for taxable purchases
- Detailed reconciliations aligning accounting records with VAT returns
- Contracts supporting capital projects or complex transactions
- Documentation supporting zero-rated or exempt supplies to validate VAT recovery eligibility
Robust documentation will facilitate efficient refund processing and reduce the risk of claim rejections.
Businesses Most Exposed to the Limitation Rule
Certain sectors and operational models are more vulnerable to the effects of this new limitation. This includes:
- Export-oriented companies regularly generating VAT credit positions
- Start-ups and new ventures with significant pre-operational or capital investments
- Multinational groups with intercompany VAT credits carried forward over multiple years
- Entities with unresolved disputes or discrepancies in VAT filings from prior periods
- Entities in zero rated supplies including healthcare and educational sectors
Targeted early intervention is critical for these groups to mitigate financial exposure.
Conclusion
The UAE’s introduction of a 5-year limitation period on VAT refund claims represents a material shift in the tax compliance. Businesses with outstanding VAT credits must urgently review their positions and adjust recovery strategies to avoid forfeiting substantial refunds.
By prioritising timely reconciliation, rigorous documentation, and strategic refund management, companies can strengthen compliance, protect cash flow, and align with the Federal Tax Authority.
About SimplySolved
As a UAE FTA Approved Tax Agency and an ISO 9001, 27001, and 42001 certified provider, SimplySolved supports businesses in managing Corporate Tax and VAT compliance.
Our approach combines practical guidance with structured compliance processes, enabling companies to efficiently manage tax procedures including the new 5-year VAT refund limitation rule. By providing best practices and proactive strategies, SimplySolved helps businesses remain compliant under UAE tax regulations.
This summary is intended as a general guide and should not be relied upon as binding or specific advice regarding your tax obligations. We strongly recommend seeking professional legal and tax guidance tailored to your individual circumstances.
