Composite Supplies Under UAE VAT – A Shift in the Narrative Post-VATP040

1️⃣ The Definition of Composite Supplies – Before Nov 15, 2024

Prior to November 15, 2024, Article 4(3) of the UAE VAT Executive Regulations recognized composite supplies where multiple components were closely linked and one component was the principal supply. In such cases, the transaction was treated as one composite supply, with VAT following the treatment of the principal component — whether standard-rated, exempt, or zero-rated.

Article 4 (3) of UAE VAT Executive Regulations: "A single composite supply shall exist in the following cases:

a. Where there is supply of all of the following:

1) A principal component.

2) A component or components which either are necessary or essential to the making of the supply, including incidental elements which normally accompany the supply but are not a significant part of it; or do not constitute an aim in itself, but are instead a means of better enjoying the principal supply.

b. Where there is a supply which has two or more elements so closely linked as to form a single supply which it would be impossible or unnatural to split.

This principle allowed for practical flexibility and followed the global practice of assessing the economic unity of a transaction, rather than relying solely on how individual elements were listed or priced.

2️⃣ Substance Over Form – A Universal Doctrine

The concept of composite supply is built on the foundational principle of substance over form — not just in the UAE, but across all mature VAT/GST systems.

a) EU – CPP Case (C-349/96): On February 25, 1999, the European Court of Justice (ECJ) issued its decision in the case C-349/96 (Card Protection Plan). This was the first case dealing with the issue of Composite Supplies (Source: https://www.vatupdate.com).The court held that if a transaction involves several elements, and one is clearly principal while others are ancillary, the entire transaction should be treated as a single composite supply, even if individual components are listed separately.

b) Australia – Westley Nominees v. Coles Supermarkets: Despite itemized charges in a lease, the court focused on the economic linkage of payments and held that the arrangement constituted a single supply. It reinforced that tax treatment should reflect commercial substance, not merely invoice form.

These cases underline a key doctrine: VAT treatment must follow the real nature of the supply — not just its structure on paper.

3️⃣ Cabinet Decision No. 100 of 2024 shifts how Composite Supplies are Identified

Effective 15 November 2024, Cabinet Decision No. 100 of 2024 amended Article 4(4) of the Executive Regulations, introducing two formal conditions for treating a supply as composite:

1. All components must be provided by the same supplier

2. The price for the individual components must not be identified or charged separately

This was further clarified by VATP040 in March 2025, which emphasized that even quotations or contracts — not just invoices — would be considered in determining whether the supply meets these conditions.

This formal shift marked a new era of compliance expectations, aligning documentation with tax classification and potentially affecting business structuring & underlying day to day processes.

4️⃣ Addressing Artificial Bundling – A Necessary Evolution?

One could see the legislative intent here as a means to address cases where artificial bundling is used to shift taxable elements under the umbrella of exempt or zero-rated supplies — reducing VAT payable and possibly creating a tax gap.

Article 4 (3) b in the VAT Executive Regulation already mentioned: "b. Where there is a supply which has two or more elements so closely linked as to form a single supply which it would be impossible or unnatural to split.", thereby taking care of the instances where the supplies were artificially bundled. Article 4 (4) now introduces a layer of compliance through documentation to ensure this. 

However, in many commercial contexts, component pricing is disclosed for transparency and negotiation — not for tax avoidance. By treating such disclosures as disqualifying factors for composite treatment, we may risk recharacterizing genuine commercial bundles as multiple supplies, not due to their economic reality, but due to their contractual structure. 

Construction contracts could be typical examples of these examples. Where the project scope of work is broken down into BOQs (Bill of Quantity), negotiated line by line and then contracted or ordered as a single composite project. The quotes, negotiations, orders are all available at line level basis, but the invoices may still be issued as a composite supply. With the changes in Article 4 (4), would these be treated as Mixed Supplies instead of Composite Supplies ? While there may be no difference in the tax rate that needs to be charged, the requirements for Tax Invoice may need review under Article 59 for all such and similar other cases. Add E-invoicing in this mix, and you must be definite about the stand you take.

5️⃣ Procurement and Pricing Transparency – Does It Conflict with Composite Supply Treatment?

In practice, one of the key components of procurement negotiations is to request component-based pricing or a break-up of costs. This helps businesses assess value, negotiate better, and make cost-effective decisions.

Yet under the current framework of Article 4(4), such transparency might lead to an unintended reclassification of the supply — potentially undermining its treatment as a composite supply. This raises questions:

• Should price identification for procurement differentiation and efficiency impact VAT treatment?

• Can form override substance in this context?

• Should Tax Invoicing requirements be defined based on this underlying context ?

• What about documentation to ensure compliance - should it include correspondence, negotiation documents, quotations as well ?

The implications are subtle, but significant — especially in long-term and high value composite supply contracts in multiple industries like leasing, insurance, or bundled service offerings.

6️⃣ Where Do We Draw the Line? 

Consider a hospital that offers different inpatient room types — standard, semi-private, deluxe — each priced differently based on facilities like TV, meals, Wi-Fi, and private bathrooms.

Logically, the price difference reflects facility value, but the entire purpose of the transaction remains healthcare. Should this variation in pricing suggest that meals or Wi-Fi are separate supplies, taxable independently?

Most would agree: No. These amenities are part of the patient experience — not ends in themselves.

Drawing a line between value-based differentiation and mixed supplies may become challenging in such cases. A highly surgical approach may lead to unintended compliance risks and reduced certainty, contrary to goal of clarity and predictability. Advance Rulings, Interpretive Guides, APAs (Advance Pricing Agreements) can do the trick just as well in addressing case-specific clarity that fits the broader economic context.

Could This Lead to Unintended Inflationary Pressures?

Let’s take residential leasing as an example to understand — being a sector of social and economic significance.

While Group B’s documentation may only differ slightly, the VAT implication changes, and so does the tenant’s cost.

The additional VAT collected is marginal — yet, it creates upward pressure on housing costs, while also adding compliance overhead and requirements for landlords. 

On the business side, this brings us to another pertinent question : When a business provides staff accommodation, inclusive of electricity, Wi-Fi, basic furniture, security, etc., should these be treated as part of the accommodation (exempt) or as separately taxable components?

Final Thought

While we have discussed residential leasing here, other exempt and taxed sectors face similar considerations. Examples could include:

i) Life Insurance — e.g., critical illness riders priced separately with life insurance contracts

ii) Financial Services — e.g., banks charging premiums or administrative fees over exempt loan interest

iii) Healthcare - e.g. mixed and composite supplies including standard rated and zero rated goods and services, where the underlying item level pricing is available and invoiced to the patients 

Beyond industries with exempt and zero rated supplies, others should be cognitive of this subtle yet significant change equally, especially in areas like alignment of Transfer Pricing and VAT on the same transactions. 

The compliance and reporting requirements for composite/ mixed supplies need deeper analysis across sectors with this change brought in by Cabinet Decision No. 100 of 2024 and clarified in Public Clarification P040. The legislative journey is evolving, and rightly so. But as we move forward, it is essential to ask: How do we preserve the integrity of exemptions — designed to protect consumers and vital sectors — while ensuring that VAT leakage is minimized, and tax treatment reflects the actual transaction?

Do you agree?

Disclaimer:

This article reflects the personal views, interpretations, and professional inquiries of the author based on publicly available information, UAE VAT developments, and comparative global tax jurisprudence. It is intended solely for educational and informational purposes. Nothing in this article should be construed as tax, legal, accounting, or technical advice. Readers are expressly advised not to rely on the content as a basis for making decisions without seeking guidance from qualified professionals or the relevant authorities. The author accepts no liability for any consequences arising from the use or reliance on the information contained herein.