A) What is Real Estate?
Real Estate – property consisting of land or buildings including
- Area of land over which rights or interests or services can be created
- Building or structure or engineering work permanently attached to land
- Fixture or equipment makes up permanent part of land or permanently attached to building, structure or engineering work
B) What is supply of real estate as per UAE VAT law?
Supply of Real Estate is considered as supply of goods, which involves transfer of ownership or right to use.
Also possible to make supply of services directly connected to real estate like
- Grant, assignment or surrender of
- Any interest in or right over real estate
- Personal right to be granted
- license to occupy land or any other contractual right exercisable over or in relation to real estate, including the provision, lease and rental of sleeping accommodation in a hotel or similar establishment
- Supply of services
- by real estate experts or agents
- involving preparation, coordination and performance of construction, destruction, maintenance, conversion or similar work
C) What is the Place of Supply for Real Estate as per UAE VAT law?
For supply of real estate:
Supply of real Estate including sale and tenancy contracts: Supply of any property located in UAE will be subject to UAE VAT.
For supply of real estate services:
- Supply of services directly connected to real estate – place of supply is where real estate is located.
- Supply of services not directly connected to real estate – subject to normal place of supply rules.
Examples of services not directly related to real estate include:
- Secondment of staff to a building site
- Advice or information relating to land or property markets generally;
- Drawing up plans for a building that does not relate to a specific site;
- Management of a property investment portfolio;
- The supply of storage of goods in a property without a right to a specific area for the exclusive use of that customer;
- Advertising services, including those that involve the use of a billboard;
- General legal advice on real estate related contracts.
If a land related service is provided alongside other services that don’t relate to land – check whether there are separate supplies being made or a single composite supply to which other services are ancillary. If there is a single composite supply directly related to land, this treatment covers all the elements that make up the supply. If there are multiple supplies, each will need to be considered on its own.
Following is a summary of VAT liability of supplies of real estate in UAE as UAE VAT law
|If you supply….||..then the VAT liability is….|
|A commercial property||5%|
|A new residential property||0%|
|An existing residential property||Exempt|
|A first supply of a charitable building||0%|
|A subsequent supply of a charitable building||5%|
|A property located withing a Designated Zone||Out of scope|
D) How to classify a property as a residential building under UAE VAT Law?
What is a Residential Building under UAE VAT Law – If the building is intended or designed for human purpose including the following is considered as residential building for the UAE VAT Law:
- building or part of it that person occupies or can be foreseen that will be occupied as their principal place of residence
- Residential accommodation for students or school pupils
- Residential accommodation for armed forces and police
- Orphanages, nursing homes and rest homes
What is not considered as a residential building under UAE VAT Law – Following are not considered as a residential building:
- Any place not a building fixed to the ground and can be moved without being damaged
- Building used as a hotel, motel, bed & breakfast establishment, or hospital or the like
- Serviced apartment for which services in addition to the supply of accommodation are provided
- Any building constructed or converted without lawful authority
Note: If small portion is used as office by occupants – still considered residential building only
E) What is first supply of residential building as per VAT?
First supply of residential property includes supply either by sale or lease of new residential building within 3 years of building’s completion date (certified by appropriate party or if occupied before completion, whichever is earlier). This supply is considered as a zero-rated supply, which means the VAT to be charged on the sale zero and VAT incurred on costs related to first supply should be recovered as input tax credit (recoverable VAT) in full including costs of construction on the basis that costs relate to zero rated first supply.
Any future supplies of the building by that taxable person (e.g. a subsequent lease, which would be exempt from VAT after the first supply) does not impact the developer’s right to recover input tax incurred before the date of first supply. This means that the taxable person is not required to make any adjustments to its initial input tax recovery on the development costs under the capital assets scheme.
F) What is subsequent supply of a residential property as per VAT law?
Subsequent supply of residential building is an exempted supply under UAE VAT, even if that supply was within 3 years from buildings’ completion. As a consequence, the VAT incurred on costs for subsequent supply is not recoverable.
G) What is the VAT Liability of service charges relating to residential buildings in UAE?
VAT Liability of service charges relating to residential buildings – charges made to owners or tenants in return for upkeep of communal area is subject to VAT at standard rate.
Question) How to classify renting of a labour accommodation in UAE as per UAE VAT law and what is the applicability of the VAT rates on renting of labour camps or labour accommodations?
Renting of a labour camp is a residential property supply or not? This differs from case to case.
If a labour camp or accommodation is provided to employees under the following conditions are considered as Residential buildings:
- Building or lodging is occupied by the employee as their principal place of residence even if shared with others.
- a building which is fixed to the ground and which cannot be moved without being damaged
- building has been constructed or converted with lawful authority
- not a building which is similar to a hotel, motel, bed & breakfast establishment, or serviced apartment for which services in addition to the supply of accommodation are provided
If employer houses its staff in a labour camp which qualifies as residential accommodation, they employer must determine whether it is making an exempt supply of the residential building to its staff.
Where the employer charges the employee consideration in exchange for the residential accommodation, then it will be treated as supply as zero rated if first supply, otherwise exempt supply.
Costs which are directly related to the provision of that residential accommodation to the employee is recoverable if the supply is zero rated supply, otherwise cannot be recovered if the supply is exempted supply.
Employer does not make a charge to the employee for the providing residential accommodation- not making a supply – VAT incurred on costs relating to the provision of the residential accommodation may be recovered as a general overhead cost of the business – including VAT incurred on costs such as utilities which service the residential accommodation, which are used by the employees for their personal benefit, where any of the following conditions are met:
- It is a legal obligation to provide those services or goods to those employees under any applicable labour law in the UAE or Designated Zone; or
- It is a contractual obligation or documented policy to provide those services or goods to those employees in order that they may perform their role and it can be proven to be normal business practice in the course of employing those people; or
- Where the provision of goods or services is a deemed supply under the provision of the VAT Decree-Law.
SPECIAL CASES WITH RESPECT TO VAT ON RESIDENTIAL PROPERTIES IN UAE
- Purchase of residential buildings off plan or prior to completion – zero rated
- Farm houses – located on agricultural land – will be treated similar to residential property – if conditions of residential property are met
- Conversion of a building into a new residential building
The first supply of a building, or part of a building, which has been converted to a residential building will be zero-rated. The zero-rating will apply provided the following conditions are met:
- the supply must take place within 3 years of the completion of the conversion;
- the original building which was converted, or any part of it, must not have been used as a residential building or comprise of a residential building within 5 years prior to the conversion work commencing.
The presence of shared or common facilities, or dividing walls or similar features in a residential building should not cause the residential building to be considered part of a pre-existing residential building.
Applicability of UAE VAT for Non-resident landlords:
The VAT registration threshold for non-residents who make taxable supplies in the UAE is nil.
It is not possible for non-resident landlords to make use of the reverse charge mechanism where their tenant is already VAT registered in the UAE, on the basis that the reverse charge mechanism is applicable only in respect of the import of concerned goods and on services received from non-resident suppliers. Given that real estate is a supply of goods, and is already located within the UAE so cannot be imported, the reverse charge mechanism is not applicable.
Where the real estate itself is sufficient enough to create a fixed establishment for the non-resident landlord, it shall be considered resident in the UAE and therefore subject to the mandatory registration threshold and eligible to be a member of a VAT group.
In order for the real estate to create a fixed establishment for the landlord, there would normally need to be sufficient human and technical resource located within the UAE in order for the landlord to make the supply of the real estate.
Applicability of VAT in Free Zones which are considered as Designated Zones as per UAE VAT law:
Supplies of real estate made within Designated Zones will be outside the scope of VAT. Real estate will not be treated as being “consumed” when sold or leased within a Designated Zone to another business to be used by that business – and therefore such supply of real estate is eligible to be treated as outside the scope of UAE VAT.
All other supplies of real estate are deemed to be supplies of services related to real estate. This includes, but is not limited to licences to occupy, and other contractual rights which are exercisable over or in relation to real estate. As a result, supplies of services related to real estate which are outlined above and performed in the Designated Zone will be liable to VAT at the standard rate
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Article by Akshitha Ramesh, CA. Email [email protected] to get all your VAT queries replied