REAL ESTATE VAT GUIDE
For VAT purposes, a supply of real estate is treated as a supply of goods. As a result, a supply of real estate involves the transfer of ownership of the real estate, or the right to use the real estate, to another person.
First supply of a residential building
The first supply of a residential building will be zero-rated for VAT purposes. This means that the VAT incurred on costs relating to the first supply of the building can be recovered in full.
The ‘first supply’ includes a supply of the building by either sale or lease, but it must be made within 3 years of the buildings’ completion date.
The completion date of a building is the earliest of the two:
- the date the building is certified as being complete by an appropriately qualified party;
- the date on which the building is occupied
Subsequent supplies of residential buildings
The supply of a residential building other than the first supply, is exempt from VAT.
Where the supplier of the residential building incurs VAT on costs relating to such a subsequent supply e.g. agent fees, or incurs VAT on costs relating to the general upkeep and maintenance of the property after the first supply, then such costs are considered to directly relate to the exempt supply of the building. Hence, the supplier will be unable to recover any VAT on such costs via its VAT return.
VAT Liability of service charges relating to residential buildings
A community master developer or building owner will often charge to the owners or tenants of units for the services of maintaining and running the communal areas. Such charges will be subject to VAT at the standard rate. Such charges do not represent the consideration for a supply of a residential building and as such will not be eligible for zero-rating or exemption.
Supply of accommodation in labour camps
- Where the employer charges the employee a form of consideration in exchange for the residential accommodation, this shall be treated as a supply for VAT purposes.
The consideration received will either be zero-rated (in respect of the first supply of a residential building) or exempt from VAT.
Any costs which directly relate to the provision of that residential accommodation to the employee, for example agent’s fees, shall normally be treated as relating to an exempt supply and shall not be recoverable.
- Where the employer does not make a charge to the employee for the provision of residential accommodation, it is not making a supply for VAT purposes. In such cases, any VAT incurred on costs relating to the provision of the residential accommodation may be recovered as a general overhead cost of the business.
Purchase of residential buildings off plan or prior to completion
The purchase of a residential building ‘off plan’ i.e. direct from the developer prior to construction of the property, or purchase of a partly completed residential building, shall be zero rated.
Farm houses which are located on agricultural land will be considered to be residential buildings where they are occupied, or intended to be occupied as a person’s principal place of residence and meet the conditions to be treated as a residential building.
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.
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.
Only those charities which are listed in a decision of the cabinet regarding Designated Charitable Bodies shall be eligible to use a building for a relevant charitable activity.
First supply of a charitable building
The first supply of a building, or any part of a building, is zero-rated if the building was specifically designed to be used by a Charity and solely for a relevant charitable activity.
There is no time limit from the date of completion during which the first supply must be made in order to qualify for zero-rating in such cases.
Where a taxable person incurs the costs of constructing a charitable building, all of the VAT incurred on the costs of such development shall be recoverable in full.
Subsequent supplies of charitable buildings
The subsequent supply of a charitable building is subject to VAT at the standard rate. This is on the basis that the supply of the building is then considered to be for commercial purposes.
In order for land to be considered “bare land” for UAE VAT purposes, none of the following must be present on top of the land:
- Completed buildings;
- Partially completed buildings; or
- Civil engineering works.
Where a plot of land is covered only by natural objects such as natural trees and natural plants, this will be considered bare land for VAT purposes.
VAT liability of bare land
The supply of bare land is exempt from VAT. This includes the supply by either lease or by sale.
As a result, any VAT on costs associated with the supply of bare land e.g. legal fees or agent’s fees, shall not be recoverable by the supplier.
Where a plot of land is supplied which does not meet the definition of ‘bare land’, it shall be considered to be commercial land and the supply shall be subject to VAT at the standard rate.
When does construction reach a stage where it is considered to be a partially completed building?
Construction would be considered to represent a partially completed building when the stage of the construction has progressed beyond foundation level.
Leasing bare land for development
|Where the landlord is….||…then….|
|making a supply of bare land||the supply will be exempt from VAT|
|making a supply of land which is not bare||then supply will be subject to VAT at the standard rate|
If the landlord makes any further supply of the land (for example, if the parties enter into a new lease agreement or if the supply is treated as made periodically under Article 26 of the Decree-Law), the landlord should charge VAT at the standard rate to the tenant since it would not be making a supply of bare land.
Commercial Real Estate
Commercial real estate is any land or buildings, which are not one of the following:
- a building designed as a residential building or number of residential buildings;
- a building intended for use by a charity for a relevant charitable activity; or
- bare land.
VAT liability of commercial real estate
The supply of commercial real estate is subject to VAT at the standard rate of 5%. The supply of commercial real estate includes sale or lease. VAT is therefore due on the total consideration received for the supply of commercial real estate. Where the consideration for the supply is payable by instalment, VAT will be due on each instalment paid.
Any VAT on costs incurred in relation to the supply shall be recoverable in full.
Mixed use developments
Where a distinct part of a mixed-use development is supplied, the VAT liability applicable to the supply shall depend on the use of the part of the building which is being supplied i.e. the supply of a commercial unit shall be taxable at the standard rate, whilst the supply of a residential unit (other than the first supply) shall be exempt from VAT.
Where a mixed use-development is sold in its entirety, it shall be necessary to apportion the consideration received between the different parts of the building. The value of consideration relating to the residential part of the building shall be treated as exempt from VAT (or zero-rated, where the supply is the first supply), and the value of consideration relating to the commercial part of the building shall be treated as standard rated.
VAT recovery on development costs
Any VAT incurred on the construction of a mixed-use development should be recoverable in full.
VAT recovery on repair & maintenance costs
Input tax incurred on the repair and maintenance costs of a property which is used for wholly commercial purposes is recoverable in full.
Input tax incurred on the repairs and maintenance of a property which is used for wholly residential purposes is not recoverable.
Where input tax is incurred on a property which is used for both commercial and residential purposes, the taxpayer is required to directly attribute the VAT on costs incurred as far as reasonably possible. For example, where a building contains retail shops and residential apartments, any costs incurred which directly relate to the shops can be recovered in full. However, any costs which directly relate to the residential properties are not recoverable.
This then leaves an amount of input tax, often called residual input tax, where the cost is used for both parts of the business e.g. roof repairs.
The input tax must be apportioned in accordance with the following method:
a) Input Tax that relates wholly to supplies where input tax is recoverable (e.g. taxable supplies), is recoverable in full;
b) Input Tax that relates wholly to supplies where the input tax is non-recoverable (e.g. exempt and non-business supplies), is blocked in full;
c) Input tax that cannot be allocated under (a) or (b) above (e.g. roof repairs) must be apportioned, and is known as “residual input tax”.
The residual input tax identified under point c) above should be apportioned using the following method:
1. Recoverable Tax % = supplies falling within paragraph (a) above / supplies falling within paragraph (a) + supplies falling within paragraph (b);
2. The percentage calculated under paragraph (1) above is then rounded to the nearest whole number; 3. The percentage calculated under paragraph (2) is to be multiplied by the amount of input tax referred to in paragraph (c) to establish the recoverable proportion of that input tax; and
The total recoverable input tax is then the sum of supplies falling within paragraph (a) plus the answer under paragraph (3).
Owners’ Associations and Management Entities
Where the OA/ME is conducting an economic activity and has the ability to register for VAT, any service charges made by the OA/ME should be subject to VAT at 5%.
As a result of charging VAT on the service charges, the OA/ME should therefore have the right to recover any VAT incurred on services it purchases from third parties for the purposes of maintaining the building.
Where a master developer incurs VAT in the course of constructing infrastructure on a large plot of land, the VAT on such costs should be recoverable as a general overhead cost of the business.
Where the business makes fully taxable supplies, the VAT incurred on the infrastructure costs shall therefore be recoverable in full. However, where the smaller plots of land in the master community are sold as bare land they shall be exempt from VAT, with no right to recover any VAT.
In the event that a mixture of bare land and commercial real estate is sold from the site, then the VAT incurred on infrastructure costs should be apportioned under the normal input tax apportionment rules.
Supplies between landlords & tenants
Where a landlord pays a prospective tenant to enter into a lease, the tenant is considered to be making a supply to the landlord of agreeing to enter into a contract.
If the tenant is registered for VAT then their services shall be subject to VAT at 5%, regardless of whether the property is a commercial or residential property.
Where the prospective tenant is not VAT registered any inducement paid by the landlord is outside the scope of VAT.
In addition, any inducements paid by a tenant to a third party to accept the assignment of a lease is not consideration for the assignment or grant, but is a standard-rated supply of services by the third party.
Where the landlord grants a rent-free period in return for no consideration, the rent-free period does not normally constitute a supply for VAT purposes. This is only the case where the tenant is not obliged or required to provide anything in return, and the tenant is not a related party.
If a landlord pays a tenant or licensee to surrender any interest in, right over or licence to occupy land, then that is a supply to the landlord by the tenant. The tenant is considered to be making a supply of agreeing to exit the lease early and if the tenant is registered for VAT then their services shall be subject to VAT at 5%. This is regardless of whether the property is a commercial or residential property.
Any consideration the landlord receives for any type of lease variation is taxable at 5% on the basis that the landlord is making a supply of agreeing to vary the lease terms.
Depending on the terms of the contract, dilapidation payments which are paid as damages or for breach of contract relating to a requirement to properly maintain the property may be considered to be outside the scope of VAT.
However, if the dilapidation payment represents consideration for repairs and maintenance works which should have been undertaken over the life of the lease by the tenant and which will be undertaken by the landlord, the payment involved is the consideration for a supply for VAT purposes and is subject to VAT at 5%.