Understanding the reverse charge mechanism (RCM) under UAE VAT helps your business handle VAT correctly when buying certain goods and services. This is especially important when dealing with imports or specific local supplies where the seller does not charge VAT. The concept might look straightforward, but the details matter in real transactions.
What Reverse Charge Mechanism Means in the UAE
In a normal VAT setup, the supplier charges you VAT when you buy goods or services. The supplier then pays that VAT to the Federal Tax Authority (FTA). Under the reverse charge mechanism, this responsibility shifts to the recipient of goods or services.
You being the buyer, report the same in your VAT return instead of paying it to the supplier. The VAT return reflects the value as both output VAT (what you owe) and input VAT (what you can claim back, if eligible).
This model treats you as if you acted as both supplier and buyer for reporting purposes, which generally leads to no net cash effect if you can reclaim the VAT in the same return period.
Reverse Charge Mechanism Example
Let’s say your business imports electronics like laptops or mobile phones, and you’re VAT-registered. Instead of paying VAT to the supplier, you’re responsible for reporting the VAT yourself on your VAT return.
If the VAT you owe is more than the VAT you can reclaim, you’ll pay the difference to the FTA. If you can reclaim the VAT in the same return period, your net VAT position will typically be zero.
Benefits of Using Reverse Charge Mechanism
For businesses, using the RCM in UAE offers several advantages:
- Cash flow management: Since you’re able to claim back input VAT in the same return period, reverse charge can help maintain cash flow.
- Simplified VAT reporting: Reverse charge simplifies VAT reporting for certain transactions, reducing the burden of having to collect VAT from suppliers and then pay it to the FTA.
- Avoiding double taxation: By applying reverse charge, VAT on imports and certain supplies is only reported once, preventing double taxation. Working with VAT consultants in UAE can make it easier to stay compliant.
When Reverse Charge Applies in UAE VAT
The UAE VAT law lists specific situations where reverse charge is applicable. These include import of goods and services, non-resident suppliers, and certain domestic suppliers.
1. Imports of Goods and Services
When you bring goods or services into the UAE from outside the state, you are usually required to self-account for the 5% VAT using the reverse charge mechanism if you are VAT‑registered. This is true whether the supplier is in a GCC country or outside the GCC.
2. Non‑Resident Suppliers
If your business receives a supply from a seller who does not have a residence or VAT registration in the UAE, you report VAT yourself. The supplier does not charge VAT on the invoice, and you complete the VAT entries in your return.
3. Certain Domestic Supplies
The UAE introduced reverse charge on specific local goods traded between VAT‑registered businesses:
- Hydrocarbons & energy products like crude or refined oil and natural gas supplied for resale or distribution.
- Gold and diamonds and products where these are the main components when bought for resale or further production.
- The UAE Ministry of Finance has issued Cabinet Decision No. 153 of 2025 (the “Decision”), introducing the application of the reverse charge mechanism on the local supply of scrap metal between VAT registered persons in the UAE effective from 14 January 2026.
These categories mean your company handles the VAT rather than the supplier.
Stay VAT Compliant With A&A Associate
The reverse charge mechanism is the newest regulation for tax in UAE. Business owners should work with local tax advisors to manage their responsibilities. We offer comprehensive VAT solutions, including VAT registration and VAT advisory on complex transactions.
