The Federal Tax Authority (FTA) has published a number of guides on its website to further assist taxpayers to understand the VAT Law and the Regulations. 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.
The real estate guide focuses on the practical implementation of the VAT Law for the real estate industry and explains when the tax liability is triggered under specific circumstances. Below we have highlighted and summarized some of the issues which the real estate guide has shed some light on:
1. Supply of Real Estate
The guide confirms that for VAT purposes, a supply of real estate is treated as a supply of goods, this includes the transfer of ownership of the real estate, or the right to use the real estate, to another person. This is an important consideration since the VAT Law treats taxable goods and services differently.
2. Residential Buildings
The Regulations define “residential buildings” as any building or part thereof which a person occupies, or where it can be foreseen a person will be occupying as their principal place of residence. The VAT Law and Regulations further state that the first supply of a residential building (within the first 3 years of its completion), will be zero-rated for VAT purposes, and so, therefore, VAT incurred on costs relating to the first supply of the building should be recoverable in full.
The real estate guide clarifies that this treatment shall apply regardless of who the building is supplied to (a registered customer, a non-registered customer, a related party etc.) provided that it is supplied within the relevant timeframe. The guide further stipulates that the VAT liability of service charges relating to residential buildings are standard-rated since they do not represent the consideration for a supply of a residential building.
There was some debate as to whether labour accommodation would be considered as residential buildings. The guide states that labour accommodations would need to be assessed on a case by case basis and it is necessary to determine whether such accommodations fit into the description of “residential buildings” as per the VAT Law. Labour camps may be considered as residential buildings, for example, if the buildings are occupied by the employees as their principal place of residence, and if they are not similar to hotels, motels or serviced apartments. 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. Therefore, this will either be zero-rated (if it’s the first supply in accordance with the Law) or exempt.
3. Bare Land
The supply of bare land is exempted from VAT; the definition of “bare land” island which is not covered by either completed, partially completed buildings or civil engineering works. The guide has clarified that when construction has progressed beyond the foundation level, then it would be considered sufficient enough to represent a partially completed building. Furthermore, the land will continue to be considered bare if the civil engineering works, such as roads, bridges, and pipes do not break the ground surface of the land. Leasing a land that is bare will be exempt from VAT, however, making a supply of land which is not bare will be standard rated.
4. Mixed-Use Developments
The guide provides further information on the liability of VAT payments for mixed-use developments. A mixed-use development is a building or plot of land which has both residential and commercial components. The VAT liability must be apportioned depending on the development; i.e. the supply of a commercial unit shall be taxable at the standard rate, whilst the supply of a residential unit shall be exempt from VAT (other than the first supply).
Where input tax is incurred on a property which is used for both commercial and residential purposes, the taxpayer is required to attribute the VAT on costs incurred as far as reasonably possible. The guide has established certain mechanisms as to how the taxable person is able to apportion the input tax.
5. Place of Supply
Place of supply rules is extremely important in establishing whether UAE VAT is applicable to the transaction. The supply of real estate, including sale and tenancy contracts, are considered a supply of goods. Where a supply of services is considered to be related to real estate, the place of supply of the services is where the real estate is located.
A supply of services is deemed to relate to real estate where the supply of services is directly connected with the real estate, or where it is the grant of a right to use the real estate. Some examples of services related to real estate include services of real estate experts or estate agents. Any services related to real estate located within the UAE shall be treated as supplied in the UAE, and VAT will be applicable to the supply.
The guide has clarified that drawing up plans for a building, management of a property investment portfolio, legal advice on real estate related contracts, and advertising services, including those that involve the use of a billboard, shall not be considered services related to real estate.
Supplies of real estate made within the “Designated Zones”, as defined in the VAT Law, will be outside the scope of VAT, subject to the conditions attached to supplies of goods within the Designated Zones.
6. Owners Association (OAs)
Owners Associations are sometimes formed in order to manage the common areas of buildings, on behalf of all the owners. OAs are required to register for VAT under certain criteria which include (but are not limited to):
- If the OAs exercise any form of control, management and administer the common areas
- Where the OAs have a legal personality distinct from its members
- Where the OAs undertake an economic activity
- Where the OAs taxable turnover exceeds the mandatory registration threshold.
Therefore, OAs are due to charge VAT on service charges, depending on the nature of the OA.
7. Construction Industry
Construction services supplied in the UAE are standard-rated, and the VAT treatment will apply regardless of the type of building which is being constructed.
The date of supply in the construction industry may be problematic since the services are usually supplied on a continuous or on-going basis over a period of time. In cases where a contract includes periodic payments or consecutive invoices, the date of supply shall be the earliest of the following:
- Date of issuance of any tax invoice
- Date of payment is due as shown on the tax invoice
- Date of receipt of payment.
If 12 months have passed from the date of provision of the goods or services and none of the above events have occurred, then the date of supply will be triggered at the 12-month point.
With regards to retention payments, VAT would only be due to the extent of any payments received, invoices issued during delivery of the services, or the work has been signed off as complete, whichever is earliest.
Other real estate issues the guide tackles include the treatment of charitable buildings, the supplies between landlords and tenants, development infrastructure, as well as the VAT refunds for new residences. For a full overview, please refer to the real estate guide published on the FTA website.