The UAE VAT Composite Supply Rules have undergone a major update, effective from November 15, 2024. As per the new regulation issued by the Federal Tax Authority (FTA), businesses are no longer allowed to separately identify or price components within a single composite supply in their invoices, quotations, or contracts.
Though this may appear to be a minor change, it has serious implications for how businesses structure their tax invoices and calculate VAT across sectors like healthcare, real estate, aviation, and gold.
Understanding UAE VAT Composite Supply Rules
To ensure proper VAT compliance in the UAE, it’s important to understand how different types of supplies are treated:
Four Types of VAT Treatments:
- Standard-rated supplies: Subject to 5% VAT.
- Zero-rated supplies: Taxed at 0% (e.g., exports, international transport).
- Exempt supplies: Not taxed, and input VAT cannot be recovered.
- Outside the scope: Not subject to UAE VAT regulations.
For bundled supplies, the VAT treatment depends on whether the supply is:
- Multiple supplies: Each component is taxed individually.
- Single composite supply: All components are taxed as one unit based on the main (principal) supply.
How to Identify Composite vs. Multiple Supplies
The classification depends on two key principles:
Principal and Incidental Supplies: Is there one main supply, with the others merely supporting or incidental?
Unnatural Splitting: Would separating the components appear artificial or not aligned with commercial reality?
Example:
A designated zone company sells machinery for AED 700,000 and charges AED 7,000 for freight. As the freight is incidental, the entire supply could be treated as a composite supply — potentially outside the scope of VAT.
What Changed in the UAE VAT Composite Supply Rules?
The new rule states that if prices are separately listed, even in a bundled supply, it will not qualify as a composite supply. This fundamentally changes how many businesses structure their pricing and invoicing.
Industries impacted:
- Gold & Jewelry: Listing “making charges” separately could make them taxable.
- Aviation: Services like seat selection and baggage fees may attract VAT despite the zero-rated fare.
- Healthcare: Separate charges for meals or accommodation could now be taxed even when core treatments are zero-rated
Sector-Wise Impact of the New Composite Supply Rules
Real Estate:
If pricing is separated for upfront vs. installment plans, it may affect how VAT is applied.
IT & Software:
Support services for international clients, if separately listed, may no longer be exempt.
Designated Zones:
Suppliers who charge separately for freight must reassess if those charges are now taxable.
Impact on Input Tax Credit
The FTA has clarified that even a single invoice with listed prices for different components can disqualify the supply from being treated as composite. This could limit a business’s input tax credit, especially for expenses like events, catering, and promotional goods.
Example:
A marketing service costing AED 100,000 includes itemized charges for venue, food, and promotional items. Under the new rules, these may be treated as separate supplies, leading to partial or no input tax recovery.
Compliance Challenges in Designated Free Zones
Free zones often benefit from VAT relief, but the new rules create additional complications:
- Freight, warehousing, and insurance charges may now be treated as separate taxable supplies.
- Under UAE corporate tax law, income from “ancillary activities” is taxed at 0%. If such activities are now taxed under VAT, businesses may face complications reconciling VAT and corporate tax rules
How to Stay Compliant with UAE VAT Composite Supply Rules
To adapt to the new framework, businesses should:
- Review existing contracts and invoices for price separation.
- Avoid listing incidental charges separately when possible.
- Update internal VAT policies and billing systems.
- Consult VAT experts to reassess your composite supply classifications.
- Ensure accurate input tax credit reporting under the revised guidelines.
Conclusion
The UAE VAT Composite Supply Rules mark a significant change in how bundled supplies are treated. While the objective is to tighten compliance and avoid manipulation, the shift may disrupt long-standing industry practices.
To reduce risks and avoid penalties, businesses must act now — review, revise, and realign. Engaging with VAT consultants and maintaining clear communication with the FTA will be essential to navigating this change smoothly. Unicorn Global Solutions is here to help! Text us on whatsApp or call us today .
Frequently Asked Questions (FAQs)
UAE VAT Composite Supply Rules define how bundled goods or services are taxed as a single supply, based on the main supply's VAT rate.
Composite supply is taxed as one supply based on the principal item, while in multiple supply, each item is taxed separately based on its own VAT treatment.
If charges are separately listed in the invoice, they are treated as separate supplies and are taxable under UAE VAT.
Businesses in designated zones must avoid separate pricing for incidental services like freight, or those may become taxable supplies.
Input tax credit depends on the VAT treatment of the principal supply. If the supply is exempt or outside the scope, input tax may not be recoverable.
NOTE:
The above note is subject to further study and clarification. It does not constitute a formal opinion from our end. Before making any decisions based on the above, we recommend consulting our experts on the subject.
