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The FTA has recently issued a public clarification under UAE VAT law that discusses the VAT treatment with respect to change in the permitted use of a building.
The FTA has recently issued a public clarification under UAE VAT
law that discusses the VAT treatment with respect to change in the
permitted use of a building.
Sale of a building may be zero-rated, standard-rated or exempt
from VAT, depending on the nature of the building and the permitted
use thereof at the date of supply. We have summarised below the
gist of the key UAE VAT positions discussed in the clarification.
The same is divided into two parts –
Taxability in relation to
'Residential Building' as per UAE VAT law
Taxability in relation to change in
the permitted use of building subsequent to sale
Taxability in relation to
'Residential Building' as per UAE VAT law
–
A. Legal Provisions under Decree - Law
Article 2 read with Article 3
(Scope of Tax and Tax Rate)
5% VAT shall be imposed on every taxable supply made in UAE by a
'Taxable Person', unless the supply qualifies for
zero-rating or exemption under the provisions of Decree-Law.
Article 1 (Taxable
Person) 'Taxable Person' is defined as any person
who is, or is required to be, registered for VAT in the UAE.
Article 25 (Date of Supply -
Sale of a building)
The date of supply is earlier of the following dates –
Ownership of the building is
transferred to the purchaser (as evidenced by the registration at
the relevant government entity);
On which the purchaser took
possession of the building;
The payment was received in respect
of the supply of the building; or
A Tax Invoice was issued in respect
of the supply of the building.
Article 26 [Date of Supply -
Lease of the building (with either periodic payments or consecutive
invoices)]
The date of supply is earlier of the following dates –
Any Tax Invoice is issued in respect
of the lease of the building;
Any payment is due as shown on the
Tax Invoice;
Payment is received in respect of the
lease of the building; or
12 months lapsed from the date the
right to use the building was provided to the lessee.
Article 19 of the Executive
Regulations (VAT due as on the date of supply) –
Where VAT is due because a payment is
made or a tax invoice is issued, the VAT is only due to the extent
of that payment or amount stated in the tax invoice;
VAT can be accounted for on the
amounts as they are billed or paid.
Applicability of VAT in
transactions relating to Residential Building
Sr. No
Reference
Taxability
Conditions to be fulfilled
1
Article 45(9)
Zero-rated
(i) the first supply of a residential building;
(ii) within three years of completion;
(iii) irrespective of whether the building is sold or
leased,
(iv) Irrespective of whether the same is sold/leased in part or as
a whole
2
Article 45(11)
Zero-rated
(i) the first supply of building;
(ii) converted from non-residential to residential through sale or
lease
(iii) according to the conditions specified in the Executive
Regulation of this Decree-Law. Article 43(1) of the Executive Regulations specifies that
the supply of residential buildings is exempt - unless it
is zero-rated provided
(i) where the lease is more than six months; or
(ii) the tenant of the property is a holder of an ID card issued
by the Federal Authority for Identity and Citizenship
3
Article 46(2)
Exempt
(i) supply of residential buildings;
(ii) through sale or lease;
(iii) unless the supply qualifies for zero-rating under Article
45(9) and 45(11) of the Decree-Law
On a reading of the above, it is clear that the supply of
'residential building' is 'Exempt' under the UAE
VAT law unless provided otherwise.
B. Legal Provisions under Executive Regulations
Meaning of Residential
Building
As per Article 37 (1) includes
As per
Article 37 (2) excludes
(a) any building or part of a building that the person
occupies, or that it can be foreseen that a person will occupy, as
their principal place of residence
(a) ...............................
(b) any building that is used as a hotel, motel, bed and breakfast
establishment or hospital of the like;
(b) ..............................
(c) a hotel apartment for which services, in addition to the
supply of accommodation are provided.
(d) .............................
Taxability in relation to
change in the permitted use of building subsequent to
sale
The Public Clarification
clarifies the VAT treatment of the sale of a building in case
wherein there is change in the permitted use of building by the
purchaser.
As per this clarification, the supply
of an apartment or any other unit within a building is treated as a
supply of a 'building';
Sale of a building is a single
indivisible supply on the date of supply as determined under
Article 25 of the Decree-Law;
Since VAT is a transaction-based tax,
the VAT treatment shall be determined independently at each date of
supply.
VAT
treatment to be decided depending upon the use of building as on
date of supply
Any change in the use of the building
before the date of supply to be disregarded for the purpose of
determining the VAT treatment. The permitted use as on the date of
supply is to be considered;
Subsequent change in the permitted
use of the building shall not affect the impact of the VAT
treatment of the preceding sale of the building
The scenarios as discussed in the clarification has been summarized
in the table for ease of reference-
In relation to the sale of 'Residential Building' as
defined above
Legs of Transaction
Type of Sale
VAT treatment
First sale
Supply of Residential Building
If it is the first supply of the
building within three years of completion, the supply may be
zero-rated,
Otherwise, the supply might be exempt
from VAT under Article 46(2) of the Decree-Law;
econd sale
There are two possible scenarios of sale by
Purchaser in the First Sale
(i) Possibility 1
Lease or Sells to a third party as a principal place of
residence
This supply is exempt from VAT under Article 46(2) of the
Decree-Law;
(ii) Possibility 2
Amend the permitted use to lease or sell the building as a
serviced or hotel apartment to a third party
This supply is subject to 5% VAT if the purchaser (owner of the
building) is a taxable person, i.e., registered for VAT or required
to be registered for VAT
In relation to the sale of 'Non-Residential
Building'-
Non-residential building refers to any building not falling within
the definition of a 'residential building', for example,
hotel/serviced apartments
Legs of Transaction
Type of Sale
VAT treatment
First sale
Supply of Non-residential building
This supply is subject to 5% VAT if the seller is a taxable
person
econd sale
There are two possible scenarios of sale by
Purchaser in the First Sale
(i) Possibility 1
Amends the permitted use of the building and leases or sells
the building as a principal place of residence to a third party,
i.e., as a 'residential building.'
This supply is exempt from VAT under Article 46(2) of the
Decree-Law;
(ii) Possibility 2
Leases or sells the building as a serviced/hotel apartment to a
third party
This supply is subject to 5% VAT if the purchaser (owner of the
building) is a taxable person.
Originally published 30 April 2020
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.