From 1 January 2026, businesses operating in the United Arab Emirates face two major fiscal reforms: a strict five-year window for UAE VAT refund claims and a phased mandatory e-invoicing regime. For Italian SMEs already established in the UAE — or planning to expand — understanding these changes is therefore not optional. It is a compliance priority.
What Changes from 1 January 2026
Under Federal Decree-Law No. 16 of 2025, the UAE Ministry of Finance has introduced a binding five-year deadline for UAE VAT refund requests. Previously, excess input VAT credits could be carried forward indefinitely. However, from 2026, that flexibility is gone.
The rule is straightforward: every VAT credit must be used to offset liabilities or be the subject of a refund request within five years from the end of the tax period in which it arose. As a result, businesses that miss the window lose the right to recovery — even if the tax was originally paid correctly.
VAT Credits from 2021 Are Already at Risk
The most urgent issue concerns credits generated in 2021. Their five-year window begins to expire during 2026. Consequently, companies that have accumulated unrecovered VAT balances from those years must act immediately.
A transitional relief provision has been included: businesses whose credits have already expired, or will expire within one year of the law’s entry into force, may still submit a refund claim by 31 December 2026. After that date, however, those credits are permanently lost.
New FTA Powers: Supplier Due Diligence Now Mandatory
The 2026 amendments also change the conditions for recovering input VAT. In particular, the Federal Tax Authority (FTA) can now deny input tax recovery where a transaction is linked to a tax evasion arrangement — and the taxpayer knew, or reasonably should have known, about it.
Holding a valid tax invoice is therefore no longer sufficient. Businesses must actively verify the legitimacy of their suppliers and document that verification process. Moreover, this is particularly relevant for high-value transactions and complex supply chains.
UAE E-Invoicing: Mandatory from Mid-2026
The second major reform concerns the digitalisation of invoicing processes. From July 2026, the UAE launches a voluntary pilot phase for structured e-invoicing. Subsequently, from January 2027, compliance becomes mandatory for businesses with revenues exceeding AED 50 million. Smaller businesses will follow in later phases.
The scope is broad: freelancers, small trading companies, and any VAT-registered entity issuing invoices are all included. As a result, static PDF documents and paper invoices will no longer be compliant. In addition, invoices must be issued in XML/JSON/UBL format through Accredited Service Providers (ASPs) and transmitted to the FTA within 14 days of issuance.
Penalties for Non-Compliance
Cabinet Decision No. 106 of 2025 establishes a specific penalty schedule for e-invoicing violations. Notably, the fines are recurring and cumulative:
AED 5,000 per month for any in-scope business that fails to implement the system by the required deadline. Furthermore, AED 100 per invoice or credit note not transmitted within the prescribed timeframe applies. Finally, AED 1,000 per day of delay in notifying the FTA of any qualifying system failure.
Given this structure, inaction becomes increasingly costly over time.
The Bigger Picture: UAE Modernising Its Tax Framework
The 2026 reforms do not increase tax rates — VAT remains at 5%. However, they significantly raise the standard of administrative compliance. Fixed deadlines, cross-checks between Corporate Tax and VAT obligations, and fully traceable digital invoicing mean the UAE is aligning with the most advanced international standards. In this respect, it follows a path already taken by Saudi Arabia, where e-invoicing has been mandatory since 2021.
For an Italian SME with operations in the UAE, this therefore means reviewing internal accounting processes, upgrading management software, and planning a structured strategy to recover historical VAT credits before the windows close.
How Kelmer Group Supports Italian Businesses in the UAE
Kelmer Group assists Italian companies at every stage of their presence in the Emirates: from company formation to ongoing tax and accounting management. If you have questions about your VAT position or want to prepare correctly for the e-invoicing transition, contact our Dubai team for a dedicated consultation.
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