Two UAE companies under common control that sell to each other must account for VAT on that sale at 5%, unless they have formed a VAT tax group with the Federal Tax Authority (FTA). Inside an approved group, supplies between members are disregarded for VAT and the group files one return. This guide explains which treatment applies, who qualifies, the joint liability each member carries, and the bookkeeping that keeps both sides of an intercompany sale correct.
TL;DR
- Without a VAT tax group, a sale between two UAE companies is a standard-rated supply at 5%.
- Inside an approved tax group, supplies between members are disregarded and no VAT is charged on them.
- Every member of a tax group stays jointly liable for the group's VAT for the periods it was a member, even after it leaves.
- Check group status on the date of each supply, because a pending application does not change the treatment.
Why intercompany sales get VAT wrong
Intercompany invoices look like internal bookkeeping, so they are often left out of VAT workings. For VAT, the question is simple: is there a supply between two separate taxable persons? Without a tax group, a sale between two separate UAE taxable persons is a standard-rated supply. Standard-rated supplies are those subject to VAT at 5% (FTA VAT Returns User Guide, 2021).
The two treatments side by side
| Situation | VAT on the intercompany sale | What your books must show | Basis |
|---|---|---|---|
| Two related UAE companies, no tax group | Standard-rated at 5% | Tax invoice, output VAT for the seller, recoverable input VAT for the buyer | VAT Returns User Guide (2021) |
| Same two companies inside an approved tax group | Disregarded: no VAT charged between members | One group return; intra-group balances reconciled, not declared as sales | FTA Tax Groups guide, section 2.1 |
| Group application submitted but not yet effective | Standard-rated until the group takes effect | Separate invoices and VAT entries until the effective date | Tax Groups guide, section 2.4.1 |
| Related companies that fail the control test | Cannot form a group; standard-rated | Separate VAT registrations and filings | Tax Groups guide, section 2.2.4 |
Who can form a VAT tax group
Tax grouping is an administrative simplification, and the FTA applies strict criteria. Each prospective member must meet these tests:
- Legal person: a company or similar entity. An individual cannot create or join a group (FTA Tax Groups guide, section 2.2.2).
- Carrying on a business: the activity must be regular and independent, not a one-off event (section 2.2.1).
- UAE establishment: a primary business establishment or a fixed establishment in the UAE. A branch of a foreign-owned company can qualify under the fixed establishment test (section 2.2.3).
- Related parties: one person must be able to control the members, through a voting interest of at least 50% or a market-value interest of at least 50% when added together, or control by other means (section 2.2.4).
The FTA may refuse an application where members have too few transactions with each other, where the only benefit is a cash offset, or where the group would be hard to audit (section 2.5.2). Only the representative member can apply, and the FTA usually issues its decision within 20 business days of receipt (section 2.4.2).
What a tax group changes in your books
- One registration and one return. The group holds one VAT registration number and submits one return summarising all supplies and purchases of its members (section 2.1).
- One representative member. All group VAT obligations, and all supplies made and received by the group, are deemed carried out in the representative member's name.
- Timing. A group takes effect on the first day of the tax period after the one in which the application is received, unless the FTA sets another date (section 2.4.1). Until then, each intercompany sale keeps its standard-rated treatment.
- Reconciliation. Keep intercompany agreements and monthly balance schedules, so each member's receivable and payable match before the group return is filed.
The joint liability you inherit
Every member of a tax group is jointly and severally liable for the group's VAT debts and obligations for the period in which it was a member. A company that leaves the group remains liable for that period (FTA Tax Groups guide, section 2.1 and section 2.4.2). Before a sale of a member or a restructuring, review that member's VAT position for the whole membership period.
The FTA can also act on its own. Where related businesses are artificially separated to avoid VAT, the FTA may register them as a tax group (section 2.5.3).
Corporate tax still applies to intercompany pricing
A VAT disregard does not change corporate tax. The Corporate Tax Law defines Market Value as the price that could be agreed in an arm's-length transaction between persons who are not Related Parties (Federal Decree-Law No. 47 of 2022). Price each intercompany service, loan and sale on that basis and keep the supporting file.
Steps to get the books right
- List every intercompany pair. Name the seller, the buyer, the service or goods, and the monthly value.
- Test the group criteria. Check each pair against the four tests above before deciding on a group application.
- Fix the treatment by date. Record each supply as standard-rated or disregarded based on group status on the supply date.
- Match both sides monthly. A receivable in one company must equal the payable in the other.
- Review changes before they happen. Check VAT exposure before any member joins, leaves or is sold.
Frequently asked questions
Is VAT charged on a sale between two companies in the UAE?
Yes, unless the two companies are members of an approved VAT tax group. Without a group, the sale is standard-rated at 5%.
Does a tax group remove VAT from every transaction between members?
It disregards supplies made between members, so no VAT is charged on them. Corporate tax pricing still needs to be arm's length.
Can any two related companies form a VAT group?
No. Both must be legal persons with a UAE establishment, carry on a business, and meet the related-party control test.
What happens if a company leaves a VAT group?
It remains jointly liable for the group's VAT for the period it was a member.
If your group application or intercompany pricing needs a second look, book a free review call with a Finanshels VAT specialist before the next return.
Related guides
Reviewed by Gautam Sanoj, Senior Tax Advisor. Last reviewed 8 October 2026. Check the current version of the FTA's Tax Groups guide and the EmaraTax application route before filing.
