Real Estate Under VAT Law
The real estate sector has played an important role in affecting lives of most of the expats in UAE since implementation of VAT. The Federal Decree Law No 8 as well as the Cabinet Resolution No 52 of 2017 contains the provisions related to various aspects of real estate. The supply of real estate however includes the sale, lease or giving right in any real estate.
Residential Building for VAT Purposes
A residential building is a building or a part thereof that is designed and intended for occupation by individuals and however includes buildings that can be occupied by any person as a main place of residence. It however doesn’t include:
- Any place that is not a building fixed to the ground and can be moved without being damaged.
- Any building that is used as a hotel, motel, bed and breakfast establishment or hospital or the like.
- A serviced apartment for which services in addition to the supply of accommodation are provided.
- Any building constructed or converted without lawful authority
The taxability in case of a new residential building: within the first three years of a residential building being constructed, the first supply would be zero rated. All the subsequent supplies shall thus be exempted even if they are within first three years are not supposed to register for VAT in case they do not have any other business.
Registration for owner of residential buildings: The owners of residential buildings activities. However, the owner of any building that is not residential will be required to register in case the value of the supplies over the preceding 12 months exceed Dh375,000 or it is expected that they would exceed Dh 375,000 over the coming 30 days.
Recovery of Vat in Respect of Expenses Related to Exempt Supply of Residential Buildings: The expenses cannot be recovered by an owner of residential building.
Commercial Building for VAT Purposes
Any building or a part thereof that is not a residential building is a commercial building. The examples are : warehouses, hotels, shops etc. An owner of commercial building can thus recover VAT in respect of the expenses related to the supply of building.
Treatment of Mixed Use Building in Reference To VAT
Depending upon whether this is a first supply or a subsequent supply, the rent or sale of the residential part of the building shall be treated as zero rated or exempt. However, the rent or sale of the commercial part of the building shall be treated as subject to VAT at 5%. The tax that has been incurred by the owner on the building is required to be apportioned where there is an exempt supply and the portion related to taxable supply at 0% and 5% may be recovered.
VAT on Realty in Designated Zones
20 designated zones across UAE with seven in Dubai, 3 each in Abu Dhabi and Ras Al Khaimah, 2 each in Sharjah, Fujairah, Umm Al Quwain and one in Ajman were announced by the FTA earlier this month.
As per the latest clarification issued by the FTA at a meeting with a group of tax consultants in the UAE, sale and lease of both commercial and residential properties in designated zones will be outside the scope of VAT. The payment of 5% VAT on the purchase of commercial property in the non designated zones can thus be made directly by the buyer to FTA and the commercial property would also get legally transferred to the buyer’s name once he has made VAT payment to FTA. .