Last verified: 18 September 2026, against the FTA Legislation Portal (tax.gov.ae) and Directive on Tax Transactions No. 2 of 2026.
DIRECT ANSWER: The Federal Tax Authority issued Directive on Tax Transactions No. 2 of 2026 on 8 July 2026 (the FTA’s own legislation page lists a publication date of 10 July 2026), effective 1 August 2026. It settles who accounts for VAT adjustments after a company leaves a UAE VAT Tax Group: from 1 August 2026, a VAT-registered company that exits a Tax Group must personally account, in its own standalone VAT return, for two specific categories of post-exit adjustment tied to transactions originally declared within the Tax Group: reductions in previously-declared taxable supplies, and reductions in expenses on which input tax was previously recovered through the group. The Tax Group can no longer absorb these adjustments on the former member’s behalf. This affects any company that has exited a UAE VAT Tax Group since VAT launched in January 2018 and still has such an adjustment unresolved.
Sources: FTA Directive on Tax Transactions No. 2 of 2026 (issued 8 July 2026, published 10 July 2026); FTA Legislation Portal, tax.gov.ae; Federal Decree-Law No. 8 of 2017 (UAE VAT Law).
Quick Context: This Is One of Five Directives Issued in July 2026
Directive No. 2 was issued alongside four others addressing separate VAT interpretation gaps. If you’re checking whether a different directive applies to your business:
| Directive | Subject | Issued | Effective |
|---|---|---|---|
| No. 1 of 2026 | Court-appointed judicial expert services are taxable supplies in the course of business | 8 July 2026 | No separate date specified |
| No. 2 of 2026 | VAT adjustments after exiting a Tax Group (this article) | 8 July 2026 | 1 August 2026 |
| No. 3 of 2026 | Digital currency transactions | 14 July 2026 | No separate date specified |
| No. 4 of 2026 | Deemed supply valuation under Article 37 | 14 July 2026 | No separate date specified |
| No. 5 of 2026 | Life insurance and reinsurance VAT treatment | 20 July 2026 | No separate date specified |
A directive is binding on both the FTA and affected taxpayers, and, unlike a public clarification, it stays in force until replaced, withdrawn, or until the underlying legislation changes.
Key Points
What the Directive Resolves
When a UAE VAT Tax Group is formed, all members are treated as a single taxable person. The Tax Group’s representative member files one VAT return covering all members’ transactions; supplies between members are disregarded for VAT.
When a member leaves, a practical question follows: what happens to VAT obligations connected to transactions that member was involved in while inside the group? The original return was the representative’s return; the leaving company was never separately declared. So after departure, if a credit note needs to be raised, a bad debt relief claim arises, or an input tax position needs correcting, who reports it?
Before Directive No. 2, this produced inconsistent answers across the market. Some Tax Groups retained the adjustment, some former members picked it up in their own filings, and the FTA had no definitive published position. The Directive settles it.
How the New Rule Works in Practice
The rule: if a VAT adjustment obligation arises after a company has exited the Tax Group, and it’s attributable to a supply or expense that occurred while the company was a group member, the former member, if still VAT-registered, accounts for it in its own VAT return. The Tax Group’s representative return covers current members only; it cannot absorb the adjustment as though the former member were still inside the group.
| Scenario | Before Directive No. 2 (pre-August 2026) | After Directive No. 2 (from 1 August 2026) |
|---|---|---|
| Credit note issued for a supply made while the company was in the Tax Group | Uncertain; practice varied by business | Former member (if VAT-registered) declares the adjustment in its own return |
| Bad debt relief claim for a receivable that arose while in the Tax Group | Uncertain; Tax Group sometimes retained the claim | Former member makes the claim in its own return once relief conditions are met |
| Input tax correction on an expense whose input tax was recovered through the group | Uncertain; group sometimes made the adjustment | Former member makes the correction in its own return |
| A genuine filing error in the original group return (not a later-arising event) | Corrected via voluntary disclosure | Still corrected via voluntary disclosure: this Directive does not change that route |
COMPLIANCE TIP
Note on scope: the Directive’s stated coverage is the two categories above, namely reductions in previously-declared supplies, and reductions in expenses with previously-recovered input tax. Broader categories sometimes bundled into this topic by other commentary (for example, standalone Capital Assets Scheme adjustments) are not attributed to this Directive by the primary advisory sources reviewed for this article and should be treated separately unless and until confirmed against the Directive text itself.
What the Directive Does Not Change: Liability, Voluntary Disclosures, and What “Documentation” Actually Means
The Directive settles who reports a post-exit adjustment. It does not settle two things businesses often assume it does.
Joint and several liability for the grouped period is unaffected. Leaving a Tax Group does not release a former member from joint and several liability for the VAT of the period during which it was a group member. The Directive changes where a later adjustment is reported going forward; it does not retroactively reallocate responsibility for the group’s original VAT position. Former members and their previous Tax Group representative can both still be pursued by the FTA for liabilities arising from the grouped period.
Genuine errors still go through voluntary disclosure, not this Directive. The Directive addresses adjustments that arise naturally after exit: a credit note issued later, a bad debt crystallising, an input tax position changing. It is not a mechanism for correcting a mistake that was already wrong when the group’s original return was filed. If your business identifies that a transaction was misreported (rather than simply requiring a later, legitimate adjustment), that still needs to be corrected through a standard voluntary disclosure to the FTA, with the usual penalty exposure that entails.
“Keep records” means a specific, transaction-level link. Generic record retention is not enough to satisfy an FTA review. In practice, the former member needs to maintain a direct bridge between:
Without that bridge, the former member cannot demonstrate the adjustment relates to a genuinely pre-exit, in-group transaction, which is the condition the Directive attaches to reporting it this way at all.
IMPORTANT
If the exit is part of a sale or restructuring: build this into the transaction documents. Where a Tax Group member exits because it’s being sold, demerged, or restructured out, the Directive creates a practical split that deal documents don’t always address by default: the legal obligation to report a post-completion adjustment sits with the former member (now typically the buyer’s entity), but the economic benefit or cost of that adjustment is a matter the buyer and seller can and should allocate contractually.
Sale and Purchase Agreements for any transaction involving an exiting VAT Tax Group member should typically address:
This is a drafting point most standard tax covenant/indemnity clauses in the UAE market don’t yet cover, simply because the Directive is new. Deals signing or completing on or after 1 August 2026 involving any VAT Tax Group restructuring should get this reviewed before completion, not after.
Who Should Review Their Position Immediately
The Directive has retrospective practical significance even though it only applies from 1 August 2026. It clarifies the position that arguably should have been followed for post-exit adjustments at any point since UAE VAT launched. Businesses that handled such adjustments differently should assess whether prior VAT returns need correcting.
IMPORTANT
Companies that exited a Tax Group and have pending credit notes. If you left a VAT Tax Group and customers have since raised credit note requests relating to supplies made during your group membership, and you haven’t been making those adjustments in your own VAT return, review your position against the Directive.
IMPORTANT
Tax Group representative members with former group members. If you’re the representative member of a UAE VAT Tax Group and have been absorbing adjustment obligations for former members in the group’s return, that practice is inconsistent with the Directive from 1 August 2026 onward. Future adjustments attributable to former members belong in their own returns.
IMPORTANT
Companies planning a restructuring or group exit. Before executing any transaction that results in a company leaving a UAE VAT Tax Group, model the post-exit adjustment obligations that will flow to the exiting entity, and, where the exit is part of a sale, get the SPA drafted to reflect who bears the filing obligation versus the economic cost (see above).
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