ME-ALLIANCE LEGAL UPDATE
Federal Tax Authority Decision No. (17) of 2026 Concerning the Cases and Conditions for Recovery of Input Tax on Employee Expenses
Federal Tax Authority Decision No. (17) of 2026 was issued on 9 September 2026 to regulate the cases and conditions under which taxable persons may recover or deduct input tax incurred on goods and services provided to employees free of charge.
The Decision supplements the legislative framework governing Value Added Tax (VAT), particularly Article (53/1/C/2) of the Executive Regulation issued under Cabinet Decision No. (52) of 2017, as amended.
Determining the Scope of Input Tax Recovery
Article (1) defines the scope of application of the Decision as covering goods and services provided by employers to employees free of charge, where such provision is based on a contractual obligation or a documented policy.
This establishes a legal criterion linking input tax recoverability to the existence of a clear contractual or regulatory basis, rather than merely to the employer’s incurrence of the expenses. Furthermore, the existence of an internal policy is not sufficient in itself, as the specific conditions applicable to each category of expenses must also be satisfied.
Recovery of Input Tax on Employee Transportation Expenses
Article (2/1) permits the recovery of input tax incurred on transporting employees between their residences and workplaces, to client locations, or for purposes directly related to the performance of their employment duties.
The Decision requires that transportation services must not be used for personal benefit and that employees must not have the option of receiving a cash allowance or financial compensation instead. This reinforces the need to distinguish between work-related transportation services and personal financial benefits.
Food and Beverage Expenses
Article (2/2) regulates the recovery of input tax on food and beverages provided to employees, requiring that employees reside in remote, distant, or isolated locations where suitable facilities for preparing or readily obtaining food are unavailable.
The provision of food must also be connected to working hours or accommodation required for employment purposes, and employees must not have the option of receiving a cash allowance. Accordingly, input tax recovery is limited to circumstances justified by actual working conditions.
Housing and Accommodation Expenses
The Decision distinguishes between two circumstances. The first, under Article (2/3), concerns accommodation required by the operational needs of the business, provided that it is necessary for employees to reside near their workplace, does not constitute an ordinary remuneration benefit, and does not include substantial personal or recreational benefits.
The second, under Article (2/4), concerns temporary accommodation provided to newly recruited employees. Input tax recovery is permitted provided that the accommodation period does not exceed 30 days and that the accommodation is proportionate to employment requirements and essential residential needs.
Mobile Phones, Telecommunications and Internet Services
Article (2/5) permits the recovery of input tax incurred on mobile phones, telecommunications packages, and internet services where these are necessary for the performance of employment duties.
The Decision requires that their use be restricted to business purposes, while allowing incidental and insignificant personal use. Employers must also maintain a documented internal policy, implement reasonable monitoring mechanisms to verify compliance, and retain the relevant records and supporting justifications.
Vehicle Parking Fees
Article (2/6) regulates the recovery of input tax incurred on parking fees for employees, provided that such expenses are directly connected to the performance of employment duties or business visits.
Employers are also required to establish a documented policy governing the circumstances and approval procedures for reimbursement and to retain supporting documents evidencing payment and the amount of tax incurred.
Relationship with Previous Legislation
The Decision does not directly amend Federal Decree-Law No. (8) of 2017 or the Executive Regulation issued under Cabinet Decision No. (52) of 2017. Instead, it specifies in greater detail the cases and conditions governing input tax recovery pursuant to Article (53/1/C/2).
Its principal regulatory contribution lies in identifying six categories of employee expenses and establishing separate conditions for each, thereby providing clearer criteria for distinguishing operational expenditure from personal benefits.
Entry into Force and Legal and Regulatory Implications
Article (3) provides for the publication of the Decision in the Official Gazette and its entry into force on 1 October 2026.
The Decision strengthens tax compliance requirements by linking input tax recovery to the nature of the expense, its necessity for business purposes, and the availability of supporting documentation.
It also increases the importance of reviewing internal policies, employment contracts, and record-retention procedures, thereby reducing the risk of input tax recovery being denied during tax audits and establishing more specific standards for the treatment of employee expenses under the VAT system.
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