How VAT on disbursements and reimbursements works in the UAE

What is VAT on disbursements and reimbursements in the UAE?

VAT on disbursements and reimbursements in the UAE refers to the tax rules that determine whether value added tax (VAT) applies when one party pays a cost on behalf of another and later recovers that amount. The distinction matters because disbursements and reimbursements receive different VAT treatment under Federal Decree-Law 8 of 2017, which introduced the 5% standard UAE VAT rate on January 1, 2018.

Getting this wrong can lead to incorrect VAT returns, denied input tax recovery, or penalties from the Federal Tax Authority (FTA). This guide explains the difference, walks through worked examples, and answers the questions UAE businesses ask most often.

Disbursement versus reimbursement: why the distinction matters

Many UAE business owners use the words "disbursement" and "reimbursement" interchangeably. Under UAE VAT law, they are not the same thing. The VAT outcome depends on who is the recipient of the supply and who is acting as the principal in the transaction.

What is a disbursement?

A disbursement is a payment you make to a third party on behalf of your client, where the supply is made directly from the third party to your client. You act only as an intermediary. The invoice from the third party is in your client's name, and you simply pass the exact cost through without adding a margin.

Because you are not making a supply yourself, a true disbursement falls outside the scope of VAT for you. You do not charge VAT on the amount you recover from your client, and you do not claim input tax on it either.

What is a reimbursement?

A reimbursement is a payment you make to a third party where you are the recipient of the supply. You then recover that cost from your client as part of your own supply. The third-party invoice is in your name, and you may add a markup.

Because you received the supply and are passing it on, the recovery is treated as part of your taxable supply. You must charge VAT on the full amount you recover, including any margin. In return, you can claim input tax on the original third-party invoice if it meets the normal conditions.

Key conditions for a true disbursement

The FTA applies strict conditions before accepting that a payment qualifies as a disbursement rather than a reimbursement. All of the following must be met:

• The third-party supply is made to your client, not to you.
• The third-party invoice is issued in your client's name.
• You recover the exact amount paid, with no markup or additional fee.
• You do not alter or enhance the third-party supply before passing it on.
• Your client knows that the supply comes from the third party, not from you.
• You separately itemise the disbursement on your own invoice or statement.

If any condition is not met, the FTA will treat the payment as a reimbursement, and VAT applies.

Comparison table: disbursement versus reimbursement

Criterion	Disbursement	Reimbursement
Recipient of the third-party supply	Your client	You (the intermediary)
Third-party invoice issued to	Your client	You
Markup or margin added	No	May be added
VAT charged on recovery	No	Yes, at 5%
Input tax claimable by you	No	Yes, subject to normal rules
Shown on your VAT return	Not included in taxable supplies	Included in taxable supplies
Client's input tax position	Client claims input tax on the third-party invoice directly	Client claims input tax on your invoice

Worked examples for UAE businesses

Example 1: law firm paying court fees (disbursement)

A law firm in Dubai pays AED 5,000 in government court fees on behalf of a client. The court receipt is issued in the client's name. The law firm recovers exactly AED 5,000 from the client, with no markup.

This is a disbursement. The law firm does not charge VAT on the AED 5,000. It does not claim input tax on the court fee. The court fee is listed separately on the law firm's statement to the client.

Note: government fees are often exempt or outside the scope of VAT, so even if the law firm treated this as a reimbursement, the underlying supply may carry no VAT. However, the classification still affects how the amount appears on the VAT return.

Example 2: freight forwarder paying shipping costs (reimbursement)

A freight forwarder in Abu Dhabi pays AED 10,000 to a shipping line for cargo transport. The shipping line invoices the freight forwarder directly. The freight forwarder then bills the client AED 12,000 (the original cost plus a AED 2,000 service fee).

This is a reimbursement. The freight forwarder charges 5% VAT on the full AED 12,000, collecting AED 600 in output tax. The freight forwarder can claim input tax on the AED 10,000 shipping invoice (AED 500, assuming the shipping line charged VAT).

Example 3: property manager paying utility bills

A property management company pays a tenant's DEWA bill of AED 3,000. The DEWA account is in the tenant's name. The management company recovers AED 3,000 exactly.

This qualifies as a disbursement. No VAT is charged on the recovery. The tenant claims any input tax directly from the DEWA invoice if eligible.

If the DEWA account were in the property manager's name instead, the payment would be a reimbursement, and VAT would apply on the amount recovered.

Common mistakes and how to avoid them

UAE businesses frequently make errors in this area. Here are the most common ones.

Treating reimbursements as disbursements

This is the most frequent mistake. If the third-party invoice is in your name, the payment is almost certainly a reimbursement, regardless of what you call it. Review every third-party invoice to confirm the named recipient before deciding on VAT treatment.

Adding a margin to a disbursement

The moment you add any fee, markup, or handling charge to the amount you recover, the entire payment becomes a reimbursement. Even a small administrative surcharge triggers VAT on the full recovery.

Failing to keep supporting documents

The FTA expects you to hold copies of the third-party invoices, proof of payment, and evidence that the supply was made to your client. Without these records, the FTA may reclassify disbursements as taxable supplies during an audit.

Double-counting input tax

In a disbursement scenario, neither you nor your client should claim input tax on the same invoice. The client claims it directly from the third-party invoice. If you also claim it, you create a duplicate deduction that the FTA will reverse, potentially with penalties.

How to show disbursements and reimbursements on invoices

Correct invoicing is essential. For disbursements, list the amount as a separate line item clearly labelled "disbursement on behalf of [client name]." Do not include it in the VAT-taxable subtotal. Attach or reference the third-party invoice.

For reimbursements, include the recovered cost within your normal taxable supplies. Apply 5% VAT to the total, including the reimbursed amount and any margin. Issue a standard tax invoice that meets FTA requirements.

If you are registered for UAE VAT and plan to apply for a VAT refund as a UAE business, accurate classification of disbursements and reimbursements is critical. Errors here can delay or reduce your refund.

Impact on VAT returns and record keeping

Disbursements do not appear in your taxable supplies box on the VAT return. They also do not appear in your input tax box. They are effectively invisible to your VAT return, though you must still keep records.

Reimbursements appear in both boxes. The amount you charge the client (including the reimbursed cost) goes into output tax. The amount the third party charged you goes into input tax, assuming the invoice meets recovery conditions.

Businesses that are considering VAT deregistration in the UAE should settle all outstanding disbursement and reimbursement positions before applying. Unresolved amounts can complicate the process and delay issuance of a VAT clearance certificate.

Penalties for incorrect VAT treatment

Under Cabinet Decision 106 of 2025, penalties for VAT violations range from AED 2,500 to AED 50,000 per violation. Misclassifying reimbursements as disbursements can result in under-reported output tax, which the FTA treats as a filing error or, in serious cases, tax evasion.

Even unintentional mistakes attract administrative penalties. The FTA may also charge a late payment penalty on any VAT that should have been collected and remitted. Keeping clear records and applying the conditions above consistently is the best protection.

Industries most affected in the UAE

Certain sectors deal with disbursements and reimbursements more than others:

• Legal services: court fees, notarisation costs, government charges paid on behalf of clients.
• Real estate and property management: utility bills, maintenance charges, municipality fees.
• Freight and logistics: customs duties, shipping charges, warehousing fees.
• Accounting and consulting: licence renewal fees, government filing fees paid for clients.
• Construction: permit fees, inspection charges, subcontractor costs.

If your business falls into any of these categories, build a clear internal policy for classifying each type of third-party payment.

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