VAT on Real Estate In The UAE
The UAE Federal Tax Authority (FTA) has released a public clarification on 27th April 2020 with regard to VAT on Real Estate in the UAE vide Number VAT018 clarifying the VAT treatment on the sale of a building and its subsequent supply, where the buyer has changed the permitted use of the building.
What is the VAT Treatment For Supply Of Real Estate In The UAE?
In the UAE VAT Law, the tax treatment prescribed for the supply of the building is different based on the use of the building such as a residential building or a commercial building. Accordingly, the supply of a commercial building either by sale or lease is taxed at a standard rate ie, 5% VAT. But the tax treatment for a residential building varies based on certain conditions. The first supply of a residential building (i.e. by way of sale or lease) made within 3 years from the date of completion is subject to VAT at zero rates. Any subsequent sale or lease of such a residential building shall be treated as an exempted supply for UAE VAT.It should be also noted that if a supply is an exempted transaction, then Input VAT related to such transaction is not allowed to be recovered.
From the above tax treatment, it is to be understood that the nature of the use of the building has an impact on the tax treatment for the supply of the building. Practically for VAT on Real Estate in the UAE, there are various scenarios that the building owner may be transferred from one person to another and the use of the building may change from commercial use to residential use or vice versa. Also, there is a concern if the change is the permitted use of the building will have an impact on the VAT treatment of the building in previous transactions or supply. By the public clarification VAT018, the Federal Tax authority (FTA) has resolved the ambiguity that VAT registrants had related to the taxability on the supply of a building.
What does the latest public clarification state about VAT Treatment on the Supply of building in the UAE?
Let us analyze the VAT treatment on the supply of building in a scenario where the permitted use of the building is changed by the buyer in the light of the said public clarification.
In the public clarification, FTA made it clear that the taxability of the supply of a building must be identified on the date of supply. Since the taxability of a building depends on the permitted use of the building (i.e. where residential or non-residential), we should consider the permitted use as on the date of supply. Therefore, any subsequent change in the permitted use of the building will not have an impact on the VAT treatment that was applied during the sale of the building. For example, where a building which is permitted to be used for commercial purposes like offices, retail outlets, shops, etc. is sold, then the VAT registered supplier shall charge VAT at the standard rate (5% VAT) on that supply. But if the permitted use of the building is later changed to residential purpose, it will not have any impact on the previous supply made at 5% when it was commercial building at the date of supply. So, the change in permitted use will not impact the VAT rate charged on the supplies made prior to such change in use.
Further, the authority prescribed that the permitted use on the date of supply would be considered to determine the VAT treatment on the supply of the building. In the above example, since the buyer has converted the permitted use of the building from commercial to residential, the subsequent sale or lease of such building shall be considered as exempted under UAE VAT as the building is a residential building on the date of supply.
VAT Treatment on Supply of building in the UAE explained with more example:
Let us take another example, which is the first supply of a residential building before the completion of three years from the construction of the building, then such sale shall be taxed at zero rates under UAE VAT Law. Later the buyer has converted the building to a Hotel apartment (commercial building) and obtained necessary permissions from the government authorities for leasing or selling it as a hotel apartment. The buyer has sold/leased the building thereafter. Such subsequent supply shall be taxed at the standard rate because the permitted use of the building on the date of such supply is a commercial purpose.
In this context, it is important to provide more insight into the VAT treatment on the supply of a residential building. As mentioned in the beginning, the first supply of a residential building within 3 years from the date of completion of the building is a taxable supply charged at zero rates. The Real Estate Guide VAT GRE1 on VAT on Real Estate in the UAE makes specific mention of building completion date. Accordingly, the completion date of a building is normally the date the building is certified as being complete by an appropriately qualified authority. However, if the building is occupied before this date, the date on which the building is occupied shall be taken to be the date of completion.
It is to be noted that for the purpose of applying zero-rating to the supply of a residential building, the first supply of the building within three years of its completion shall be considered. That means, we need to see whether it is the first supply of the newly constructed building permitted to be used as a residential building to tax at zero rates. But if the building was initially permitted as commercial and later the permitted use of the building is changed into residential, then the further supply will be exempted under UAE VAT Law. At the same time if a commercial building is later converted to a residential building shall be subject to the zero rates provided that the first supply takes place within 3 years of the completion of the conversion and it is subsequent supply by sale/lease shall be treated as exempted for UAE VAT
Summary on Latest Public Clarification on VAT on Real Estate in the UAE clarifying VAT Treatment on Supply of Building in the UAE
The public clarification VAT018 issued by the Federal Tax Authority clarifies that the VAT treatment of the sale of a building is independent of its subsequent or previous supply and has to check the permitted use of the building on the date of supply. Thereof if the permitted use of the building is changed by the buyer, it will not change the previous tax treatment adopted regardless of whether the buyer amends the permitted use to the building to use as a residential building or commercial building.
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