In the wake of the Global pandemic, COVID 19, the government took quick actions to make reassuring noises of support for businesses. Many authorities came up with major relief packages for companies including companies operating in free zones/designated zones. It includes rent postponement up to six months to help them to overcome COVID-19 challenges.
We would like to invite your attention to the VAT impacts of these decisions of the Government through a case study.
A UAE national owns a commercial building in Dubai. The entire building has been leased out to M/s. XYZ Enterprises LLC, a retail trading group in the UAE. The lease agreement has been entered for one year starting from 1st January 2020 to 31st December 2020. As per the contract, the tenant is required to pay a yearly lease rent of AED 120,000/- payable in four instalments.
As per the contract, the payment due dates is 1st January 2020, 1st April 2020, 1st July 2020, 1st October 2020. M/s. XYZ Enterprises LLC paid the first instalment of the rent of AED 30,000 as on the agreed date
. For the balance instalments, it issued post-dated cheques each amounting to AED 30,000/- the dated beginning of each quarter. Later, from 15th March 2020 due to the outbreak of COVID 19 pandemic across the world considering the safety and health of the staff and the general public the management of the company decided to temporarily stop the operations till 30th June 2020.
As per the contract, the second instalment of the lease rentals will become due for payment on 1st April 2020. However, the management of the company realized that the company is facing severe cash flow issues and that it may not be able to honour the second cheque.
The company, therefore, approached the landlord requesting him either to reschedule payment due dates of the instalments of the rent for the remaining three quarters or to provide any concession in the rent amount during the shutdown period. As a VAT registered taxable person, what will be the VAT treatment to be adopted by the Landlord in the following two situations:
Now let us discuss how such discount shall be treated for the purpose of VAT:
Note: Where the landlord grants a rent-free period in return for no consideration, the rent-free period does not normally constitute a supply for VAT purposes. This is only the case where the tenant is not obliged or required to provide anything in return, and the tenant is not a related party. However, if a tenant undertakes to provide anything to the landlord in return for the rent-free period, this would represent a barter transaction.
For example, a landlord may grant a rent-free period to a tenant in return for the tenant agreeing to refurbish the property. In such cases, both supplies will be of equal value, but will not necessarily have the same VAT liability (for example, where the landlord is supplying residential property). Where VAT is charged on the value of the barter transaction this would be recoverable subject to the normal rules.
Emirates Chartered Accountants Group is a Registered Tax Agent with the Federal Tax Authority (FTA) as Emirates International Chartered Accountants Group providing exclusive Tax Agency Service to businesses in the UAE. Our Tax Professionals are highly qualified and well versed with the UAE Tax Law with the practical implementation of VAT in UAE and Bahrain. We understand that every business is different from the other. Hence, each of our services is tailored as per your business needs.
Mr. Pradeep Sai
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