On 10 July 2026 the UAE Federal Tax Authority (FTA) published Directive No. 2 of 2026 (dated 8 July). It took effect on 1 August 2026 and settles a long-running ambiguity: a former VAT Tax Group member that stays VAT-registered after exit must report output and input tax adjustments in its OWN VAT return, not in the group’s.
The rule went live in a quieter window between two of the FTA’s more visible summer releases — Directive No. 3 of 2026 on converting digital currency values to AED for VAT (published 17 July) and Decision No. 12 of 2026 on Top-up Tax registration deadlines. But in practical impact for businesses, Directive No. 2 is no less important: it directly affects any UAE company that has gone through a change of composition in a VAT Tax Group, including M&A, asset disposals, spin-offs and changes of control.
What Directive No. 2 of 2026 requires
The full title is Directive on Tax Transactions No. 2 of 2026 on VAT Adjustments Following a Registrant’s Exit from a Tax Group. It belongs to a series of five binding directives on tax transactions issued by the FTA in summer 2026 (confirmed by KPMG UAE Tax Insights). Every directive in the series is binding on both the FTA and the taxpayer and remains in force until repealed, replaced or overridden by amended legislation.
The core idea of No. 2 of 2026 is to close an operational gap that arose when a company left a VAT Tax Group but an adjustment later became necessary on a transaction previously declared by the group (a return, a post-sale discount, a cancellation). Before the directive, the parties often argued whose return should carry the adjustment — the remaining group’s, or the departing member’s. Directive No. 2 of 2026 answers unambiguously: if the former member remains VAT-registered after exit, the adjustment goes into its own VAT return, not into the group’s.
Who exactly the rule applies to
Directive No. 2 of 2026 applies to a company that:
- was previously a member of a UAE VAT Tax Group;
- exited the group — through M&A, business sale, spin-off, change of control or another restructuring;
- after exit, kept its own VAT registration in the UAE and continues to file returns as a stand-alone registrant.
If the former member deregistered for VAT at the time of exit or immediately afterwards, the general provisions of the UAE VAT law and executive regulations apply, rather than this directive. For the procedural side of composition and structure changes, see the separate guide on changing a UAE company’s structure — shareholders, directors, licence.
Which adjustments are covered
The directive expressly covers two categories of adjustments, provided the underlying transaction was originally declared in the former VAT Tax Group’s return:
- Output tax adjustments — reductions in the value of taxable supplies previously declared by the group. Typical events: customer return of goods, post-sale (retrospective) discount, cancellation of supply, credit note.
- Input tax adjustments — reductions in taxable expenses on which input tax was previously recovered through the group’s return. Typical events: return of purchased goods to supplier, retrospective discount from supplier, change of use of an asset.
In both cases, the former member that remains VAT-registered reports the adjustment in its own VAT return for the period of the event, not in the former group’s return. The mechanic is anchored to the moment the adjustment event occurs — if that moment is after the exit date, responsibility for the adjustment moves with the departing member.
Documentation requirements
The directive expressly requires the continuing registrant to retain documents and records showing that the adjustment relates to a taxable supply or taxable expense previously declared in the former Tax Group’s VAT return. A practical minimum set:
- a copy of the relevant former Tax Group VAT return for the period of the original transaction;
- primary documents for the transaction — invoice, contract, transport documents, evidence of supply;
- documents for the adjustment event — credit note, return agreement, cancellation record, additional discount agreement;
- internal calculation of the adjusted output/input tax amount, with a note of the calculation method;
- reflection of the adjustment in the former member’s own VAT return, cross-referenced to the original period.
The documentation requirement is explicit in the directive text and reinforced by the general UAE tax documentation regime. For a baseline on UAE VAT accounting requirements, see the guide on UAE VAT 5% for businesses — when to register and what a mistake costs.
Why it matters for M&A and restructurings
VAT Tax Groups are widely used by UAE holding structures: several related companies form a single group, file one consolidated VAT return, and intra-group transactions are ignored for VAT. In M&A deals, asset disposals, spin-offs or changes of control, the composition of the group inevitably changes — a member exits, and obligations relating to previously declared group transactions may follow it.
Before Directive No. 2 of 2026, allocating responsibility for post-event adjustments was often negotiated in the SPA (Sales & Purchase Agreement). The mechanic is now fixed: if the departing member remains VAT-registered, the adjustment belongs to it. For deals, this simplifies tax due diligence and reduces the volume of disputed clauses on how VAT liabilities are split between seller and buyer.
Practical consequence: when preparing a UAE M&A transaction, it is worth expressly recording in the SPA the departing member’s obligation to declare relevant adjustments in its own return, together with the mechanism for exchanging information and primary documents with the remaining group for the full VAT documentation retention period.
What businesses should do now
Practical steps for companies that have recently exited a VAT Tax Group or plan to do so soon:
- Inventory of open transactions. List the transactions previously declared by the group on which adjustments are possible in the next 12 months (returns, retrospective discounts, credit notes, changes of use).
- Update the accounting policy. Reflect the rule: events dated after the exit go into the former member’s own VAT return, not into the group’s.
- Set up document exchange. Agree with the remaining group a workflow for sharing copies of returns and primary documents for the periods of the original transactions, for the full UAE VAT documentation retention window.
- Reflect in the SPA. For upcoming M&A deals, include a clause on the split of post-exit VAT adjustment responsibilities and on document exchange.
- Edge cases — request an individual clarification. For complex scenarios (partial exit, simultaneous deregistration, contested event date) request an individual clarification from the FTA or engage a tax specialist before filing the next VAT return.
This material is informational. Primary source: Federal Tax Authority (tax.gov.ae), Directive on Tax Transactions No. 2 of 2026 on VAT Adjustments Following a Registrant’s Exit from a Tax Group (directive date 8 July 2026, published 10 July 2026, effective 1 August 2026). Additional analysis: KPMG UAE Tax Insights «FTA issues five binding VAT directives on tax transactions», SAIF Audit «UAE VAT Group Exit Adjustments | FTA Directive 2026», IR Global, Deloitte Middle East «FTS updates policy on issuing clarifications and directives». For application to your specific operating model, consult a tax specialist.
