If your business has recently left a UAE VAT Tax Group, or is planning a restructuring, disposal, or ownership change that will trigger an exit, you now have clear regulatory guidance on one of the most confusing areas of VAT group administration. The Federal Tax Authority has issued Directive on Tax Transactions No. 2 of 2026, which settles a long-standing practical question: who reports a VAT adjustment when the original supply or expense was declared under the Tax Group’s VAT return, not the individual member’s own return?
This directive is effective from 1 August 2026, and it has direct compliance implications for any VAT-registered business that has exited, or intends to exit, a Tax Group while remaining independently VAT-registered. At Tax Gian, our VAT consultants in the UAE help businesses navigate exactly this kind of post-restructuring compliance gap. Here is what you need to know.
What Is FTA Directive No. 2 of 2026?
Directive No. 2 of 2026 was issued on 8 July 2026 by the Federal Tax Authority under the powers granted by the VAT Law (Federal Decree-Law No. 8 of 2017) and its Executive Regulation. It addresses adjustments to output tax and input tax that arise after a registrant ceases to be a member of a VAT Tax Group but continues to hold a standalone VAT registration.
In plain terms, the directive confirms that a former Tax Group member cannot leave a later adjustment behind with its previous group simply because the original transaction was reported through the group’s VAT return.
Who Must Report the Adjustment After Leaving a VAT Tax Group?
Under Clause 1 of the directive, if a person:
- Was previously a member of a UAE VAT Tax Group, and
- Ceases to be a member of that group, but
- Remains a VAT registrant in their own right, and
- Has adjustments relating to taxable supplies made, or taxable expenses incurred, before exiting the group
then that person, as an individual registrant, must make the adjustment in their own VAT return, provided the original supply or expense was previously declared in the Tax Group’s return.
This closes a compliance gap that many businesses undergoing VAT group reorganisation, mergers, disposals, or ownership restructuring were previously unsure how to handle.
What Counts as an Adjustment Under the Directive?
Clause 2 of the directive specifically identifies two categories of adjustment that fall within its scope:
- Reductions in the value of taxable supplies that were previously declared in the Tax Group’s VAT returns, for example, credit notes, rebates, discounts, or bad debt relief issued after the exit date but relating to pre-exit supplies.
- Reductions in the value of taxable expenses where input tax was previously recovered through the Tax Group’s VAT returns, for example, corrections, supplier credit notes, or reversed input tax claims relating to pre-exit expenses.
Both scenarios require the former group member to reflect the adjustment in its own, standalone VAT return going forward, rather than through the group it has already left.
Record-Keeping Obligations for Former Tax Group Members
Clause 3 places a clear documentation burden on the registrant. You must retain supporting documents and records that demonstrate the adjustment genuinely relates to a taxable supply or taxable expense that was previously declared within the Tax Group’s VAT returns.
In practice, this means maintaining:
- Copies of the relevant Tax Group VAT returns showing the original declaration
- Credit notes, debit notes, or correction documentation supporting the adjustment
- A clear audit trail linking the pre-exit transaction to the post-exit adjustment
- Internal reconciliation records evidencing the transition from group-level to standalone VAT reporting
The FTA can request this evidence at any time, so businesses should not treat this as a paperwork formality. Weak documentation here is a common trigger for VAT audits and penalties.
When Does the Directive Take Effect?
Directive No. 2 of 2026 was issued on 8 July 2026 and is published in the Official Gazette. It becomes effective from 1 August 2026. Any adjustments relating to pre-exit supplies or expenses that arise on or after that date fall squarely within its scope, regardless of when the original transaction occurred.
Practical Example
Suppose a subsidiary leaves a UAE VAT Tax Group on 1 September 2026 but keeps its own VAT registration. In October 2026, a customer is issued a credit note reducing the value of a taxable supply that the subsidiary made in July 2026, while it was still part of the group and the supply was declared through the group’s VAT return.
Under Directive No. 2 of 2026, the subsidiary, not its former Tax Group, must report this output tax reduction in its own VAT return, and must keep documentation proving the original supply was declared under the group’s earlier return.
Who Should Pay Attention to This Directive?
This directive is particularly relevant for:
- Businesses undergoing VAT group restructuring or de-grouping
- Companies involved in mergers, acquisitions, or disposals affecting VAT group membership
- Finance and tax teams managing the transition from group-level to standalone VAT reporting
- Any registrant that has recently exited, or is planning to exit, a Tax Group
If your business falls into any of these categories, now is the time to review your VAT registration status, invoicing procedures, and internal reporting workflows to ensure adjustments are captured correctly from 1 August 2026 onwards.
Frequently Asked Questions
Does this directive apply to businesses that left a VAT Tax Group before 1 August 2026?
The directive applies to adjustments made on or after 1 August 2026, even where the original supply or expense was declared before that date, as long as it was declared through the Tax Group’s VAT return.
What happens if the adjustment is not reported by the former Tax Group member?
Failure to report the correct adjustment in the appropriate return can lead to inaccurate VAT filings, FTA scrutiny, and potential penalties under the Tax Procedures Law.
Can the previous Tax Group still report the adjustment on the former member’s behalf?
No. The directive is clear that the individual registrant, not the group it has left, is responsible for reporting the adjustment, provided it remains VAT-registered.
What if the former Tax Group member deregisters from VAT entirely?
The directive specifically applies to registrants who remain VAT-registered after leaving the Tax Group. Businesses considering full deregistration should seek separate advice on their obligations.
How Tax Gian Can Help
Getting VAT group exit adjustments wrong can result in under-declared output tax, incorrectly recovered input tax, and exposure to FTA penalties. Tax Gian’s VAT advisory team helps UAE businesses:
- Assess the VAT impact of leaving or restructuring a Tax Group
- Set up compliant post-exit VAT reporting processes
- Identify and correct pre-exit adjustments in line with Directive No. 2 of 2026
- Maintain audit-ready documentation and records
- Manage voluntary disclosures where past periods need correction
If your business has recently exited a VAT Tax Group, or is planning restructuring that will affect your VAT grouping status, speak to our VAT consultants before your next return is due.
Get in touch with Tax Gian today for a consultation on VAT Tax Group compliance and to ensure your post-exit adjustments are reported correctly under the new FTA directive.
