Deemed Supplies under UAE VAT
Under the UAE VAT legislation, VAT is generally imposed on supplies of goods and services made for consideration. However, in certain circumstances, the law treats transactions where no consideration is received as taxable supplies. These transactions are referred to as "Deemed Supplies".
The concept of deemed supply ensures that businesses cannot obtain an unintended VAT advantage by using goods or services for non-business purposes, free giveaways, transferring assets without consideration, or retaining assets upon deregistration after recovering input VAT.
Under Article 11(3) regarding the Deemed Supply provision of the UAE VAT Law, where input VAT has been recovered on goods or services and those goods or services are subsequently used for purposes other than the business, a deemed supply arises to the extent of the non-business use.
Why Has the FTA Introduced a Specific Methodology for Valuing Deemed Supplies of Services?
The valuation of a deemed supply of services has historically been one of the complex areas under the UAE VAT regime. Unlike ordinary taxable supplies, deemed supplies may not involve a commercial transaction between two parties or an agreed consideration. Consequently, determining the taxable value requires a methodology that accurately reflects the economic value of the service while remaining consistent with the principles of the VAT Law.
Directive on Tax Transactions No. 5 of 2026 addresses this challenge by introducing a structured valuation methodology. The Directive serves several important objectives.
1. To Determine a Taxable Value Where No Consideration Exists
In a normal commercial transaction, VAT is calculated on the consideration agreed between the supplier and the customer. However, a deemed supply of services arises where services are provided without consideration.
Since no invoice is issued and no amount is paid by the recipient, there is no transaction value on which VAT can be calculated. This creates a practical difficulty not only for taxpayers but also for the Authority in identifying a reliable and consistent basis for valuing the service. Without a prescribed valuation methodology, determining the correct taxable value of the deemed supply would therefore remain subjective and challenging.
The Directive therefore provides a consistent framework for establishing a taxable value in situations where no consideration exists.
2. To Prevent Overvaluation or Undervaluation of Deemed Supplies
A significant feature of the Directive is that it avoids both excessive and insufficient taxation.
If VAT were calculated solely on the open market value, businesses could be taxed on an amount that includes a commercial profit they never actually earned. Conversely, using only the direct cost of providing the service could understate the true value where indirect costs form part of the service.
By starting with the open market value, removing the profit element, and applying the proportion of VAT-bearing costs, the methodology provides a balanced and reasonable approach that reflects the actual cost attributable to the deemed supply.
3. To Introduce Consistency Across Industries
Prior to the issuance of the Directive, businesses may have adopted different approaches when valuing deemed supplies of services, resulting in inconsistent VAT treatments for similar transactions.
The Directive establishes a standardized methodology that can be applied consistently across different sectors, while allowing businesses to use either their own historical net profit margin or, where appropriate, the average net profit margin of the relevant industry. This promotes uniform application of the VAT Law and enhances certainty for taxpayers.
4. To Enhance Transparency During FTA Reviews and Audits
The prescribed methodology relies on objective financial information, including:
Using these measurable financial indicators enables businesses to demonstrate how the taxable value has been calculated and provides the FTA with a transparent basis for reviewing the calculation during an audit.
- The open market value (or comparable value) of the services;
- The taxable person's net profit margin from the preceding financial year;
- Total business costs;
- Costs on which input VAT has been incurred; and
- Supporting accounting records.
Valuation of Deemed Supplies of Services – Directive on Tax Transactions No. 5 of 2026
The Federal Tax Authority (FTA) has issued Directive on Tax Transactions No. 5 of 2026, providing important guidance on the method for determining the value of deemed supplies of services under Article 37 of the UAE VAT Law.
The Directive introduces a structured methodology for determining the taxable value of deemed supplies of services by considering:
- The open market value of the services;
- The removal of the profit element; and
- The proportion of costs on which input VAT has been incurred.
This guidance provides greater certainty to businesses when calculating VAT liability arising from deemed supplies of services.
Determining the Value of a Deemed Supply
The Directive provides that the value of a deemed supply of services should be determined based on the total direct and indirect costs incurred by the taxable person on which input VAT has been incurred.
The valuation methodology consists of the following four steps:
Step 1 – Determine the Open Market Value
The first step is to identify the Open Market Value (OMV) of the services forming the deemed supply.
Where the open market value cannot be determined, the value of comparable services supplied under similar circumstances should be considered.
Step 2 – Remove the Profit Element
Once the open market value has been established, the embedded profit margin must be removed to determine the estimated cost of providing the service.
The calculation is:
|
Estimated Total Cost = Open Market Value ÷ (1 + Net Profit Margin) |
The net profit margin should be calculated based on the taxable person's financial statements for the preceding financial year.
Where the taxable person's own profit margin cannot be determined, the average net profit margin applicable to the relevant industry sector may be used.
Step 3 – Determine the Input Tax Cost Ratio
The taxable person must determine the percentage of total costs incurred during the preceding financial year on which input VAT was incurred.
The calculation is:
|
Input Tax Cost Ratio = Costs on which Input VAT was Incurred ÷ Total Costs Incurred |
This percentage determines the portion of the estimated service cost that represents VAT-bearing costs.
Step 4 – Calculate the Value of the Deemed Supply
The final value of the deemed supply is calculated by applying the input tax cost ratio to the estimated total cost.
|
Value of Deemed Supply = Estimated Total Cost × Input Tax Cost Ratio |
The resulting amount represents the taxable value of the deemed supply for VAT purposes.
Practical Example
Company A, a UAE VAT-registered IT consulting firm, provides free IT advisory services to a related entity. Since the services are provided without consideration, the transaction constitutes a deemed supply of services under Article 37 of the UAE VAT Law.
The following information is available from the preceding financial year:
| Particulars | Amount |
|---|---|
| Open Market Value of Services | AED 100,000 |
| Net Profit Margin | 25% |
| Total Business Costs | AED 4,000,000 |
| Costs on which Input VAT was Incurred | AED 3,200,000 |
Step 1 – Open Market Value
Open Market Value of IT advisory services: AED 100,000
Step 2 – Estimated Cost (Excluding Profit)
Estimated Total Cost:
AED 100,000 ÷ (1 + 25%) = AED 100,000 ÷ 1.25
= AED 80,000
Step 3 – Input Tax Cost Ratio
Input Tax Cost Ratio: AED 3,200,000 ÷ AED 4,000,000 = 80%
Step 4 – Value of Deemed Supply
Deemed Supply Value: AED 80,000 × 80% = AED 64,000
Output VAT Payable
AED 64,000 × 5% = AED 3,200
| Particulars | Amount |
|---|---|
| Open Market Value | AED 100,000 |
| Estimated Cost (excluding profit) | AED 80,000 |
| Input Tax Cost Ratio | 80% |
| Final Deemed Supply Value | AED 64,000 |
| Output VAT Payable @ 5% | AED 3,200 |
Conclusion
Directive on Tax Transactions No. 5 of 2026 provides a practical and transparent framework for valuing deemed supplies of services. By removing the profit element, considering only VAT-bearing costs, and relying on objective financial data, the methodology ensures that the taxable value reflects the true economic cost of the service while preserving the neutrality and fairness of the UAE VAT system.
The Directive also promotes consistency among taxpayers, enhances certainty in the application of Article 37 of the UAE VAT Law, and provides businesses with a clear and defensible approach to determining the VAT due on deemed supplies of services.
