Real Estate VAT Guide
The real estate sector in UAE can be construed as an integral part of the UAE economy. It supports many livelihoods and provides the necessary infrastructure, commercial and residential spaces, which are crucial for the development of the country. There have been a few legal issues surrounding the supply of real estate- concerning both commercial and residential properties. Despite the detailed provisions mentioned in the VAT Law and the Regulations, there remains a number of practical concerns faced by various VAT registered businesses on how to assess the supply of services related to real estate, and whether they can be covered under the exempt, zero-rated categories, or whether they should be standard-rated.
Keeping the issues in mind, The FTA has issued the VAT Real Estate Guide in February 2019. The purpose of this document is to provide guidance on how VAT affects businesses which operate within the real estate sector, as well as for owners or landlords of real estate. Below we have highlighted and summarized some of the issues which the real estate guide has shed some light on:
Supply of Real Estate:
The Real Estate VAT Guide clearly indicates that the supply of real estate is treated as a supply of goods (see Article 2 of Cabinet Decision No. (52) of 2017 on VAT Executive Regulations). It involves the transfer of ownership of the real estate, or the right to use the real estate, to another person. This is an important consideration as the Federal Decree-Law. No (8) of 2017 treats both goods and services separately.
Place of Supply:
The place of supply of real estate for VAT applicability is the place where the property is located. This goes for the supply of both goods and services in relation to real estate.
A supply of real estate is usually considered a supply of goods. In certain cases, a supply of services can be considered related to real estate only if it is directly connected to the specific property, or if it contains the transfer of rights to use the property.
Services of a real estate agent can also be included in this category. VAT at the standard rate will be applicable on all real estate related services being performed relating to a property located in the UAE.
The real estate services for VAT purpose do not include things like drawing up building plans, legal advice on property, advertising services, real estate investment management, marketing, etc.
Supplies of real estate within the UAE Designated Zones are not covered under the scope of the VAT. These will be treated separately as per the laws of supplies in the Designated Zones.
As per Article 37 of Cabinet Decision No. (52) of 2017 on VAT Executive Regulations, any building or part of a building which is being supplied to be used as a place of residence will be treated as a residential building. The first supply of such a Residential Building (within 3 years of completion) shall be Zero Rated whereas subsequent supply shall be exempt from VAT.
The Guide further clarifies regarding labour accommodation provided by employers. A labour camp shall be treated on a case to case basis if it meets the definition of Residential buildings. For example, labour camps and buildings which are occupied as the principal place of residence of an organization’s employees, and are not like hotels, motels or service apartments, can be treated as residential buildings. Only if the employee is charged a fee/rent for the accommodation and it’s the first supply, it will be treated as zero-rated under VAT.
A charitable building means any building, or any part of a building, that is specifically designed to be used by a charity and solely for a relevant charitable activity. The major change to the Guide is a correction regarding the conditions for the application of the zero-rate of VAT to the "first sale or a lease of a building" to charities. The VAT Guide clearly mentions that the first supply of charitable buildings shall be zero rated and there shall be no time limit from the date of completion during which the supply must be made. The subsequent supply shall be charged at standard rate.
Any land which is not covered by any building, fully or partially completed, or any other civil engineering work, is treated as a bare land for VAT. However, a land on which construction is reached beyond the foundation level, or if the ground surface has been penetrated, it will no longer be considered bare. That means, if the civil engineering works, such as bridges, pipes, and roads do not break the surface of the land, it will still be treated as a bare land. Leasing or supplying a bare land is exempt from the VAT.
Mixed Used Developments:
Buildings that are being used for both residential and commercial purposes are subject to VAT in different parameters. The supply of the commercial section of such a building would be taxed at the standard 5% VAT, the first supply of the residential part of the building is zero-rated whilst the subsequent supplies are exempt from the VAT.
The input tax can only be recovered on a commercial property and zero-rated residential property. The supplies exempted from VAT are not applicable for a tax refund.
An Owner Association (OA) is responsible for managing common areas of buildings. It usually includes the owners. OAs are required to register under VAT under the following conditions:
- If the OAs are responsible for managing or controlling or administrating the common area of buildings
- Where the OAs follow certain economic activity
- Where the OAs have a legal formation
- Where the taxable turnover of the OAs is more than the mandatory VAT registration threshold.
Registered OAs can charge VAT on charges of the services provided by them.
VAT shall be applicable at the standard rate of 5% on all construction services supplied in the UAE, irrespective of the type of building being constructed. The date of supply of construction services shall be the earliest of the
- A. Date of issuance of a tax invoice
- B. Date of issuance of a tax invoice
- C. Payment due date as shown on the invoice
If none of the above events takes place within 12 months from the date of supply of real estate goods/services, the date of supply will be the 12-month point.
The Real Estate VAT Guide also sheds light on issues like the supplies between landlords and tenants, Vat Refunds for new residences, Development Infrastructures. It can be accessed through the FTA website.
After the publication of the VAT Guide, it shall be seen how these shall affect the Real Estate landscape of the UAE in the near future. The businesses shall have to keep in mind the various factors and provisions relating to each transaction independently. Eventually it is hoped that it shall help to make a positive tax contribution to the UAE economy.
We recommend taxpayers to consider the aforementioned in the context of their business activities. Contact us at firstname.lastname@example.org for further assistance.