How VAT affects businesses which operate within the real estate sector?


UAE VAT Guide: Real Estate – VATGRE1

The Federal Tax Authority (FTA) recently published guidance about the VAT treatment of supplies of real estate as well as other transaction or activities occur within the real estate industry. The purpose of Real Estate – VATGRE1 (the “Guide”) is to provide guidance on how VAT affects businesses which operate within the real estate sector.
What is the supply of real estate?

The Guide mentions that for VAT purposes, a supply of real estate is treated as a supply of goods. With this, 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. The Guide also states that the supply of real estate includes the supply of services which are directly connected to real estate. Examples of these real estate related services include:

  • The grant, assignment or surrender of any interest in or right over real estate; /li>
  • The grant, assignment or surrender of a personal right to be granted any interest in or right over real estate; /li>
  • The grant, assignment or surrender of a 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; /li>
  • A supply of services by real estate experts or estate agents; and /li>
  • A supply of services involving the preparation, coordination, and performance of construction, destruction, maintenance, conversion or similar work. /li>

Residential buildings

The Guide provides VAT treatment for the supply of the 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 should be recoverable in full. The word “first supply” should be noted that it must be made within 3 years of the buildings’ completion date. The Guide defines that the completion date of the building is normally the date the building is certified as being complete by an appropriately qualified party. However, if the building is occupied before this date, the date on which the building is occupied shall be taken to be the date of completion.

The Guide also points out that any subsequent supplies of the building, either by sale or lease, within 3 years from its completion date shall not be zero-rated, as they will not qualify as the first supply of the building. In addition, if the taxable person incurs the costs of constructing a residential building, all of the VAT incurred on the costs of such development shall be recoverable in full on the basis that the costs related to the zero-rated first supply.

Moreover, the supply of a residential building other than the first supply is exempt from VAT. This includes where the subsequent supply of the property is supplied within 3 years from the buildings’ completion. In relation to this, any cost relating to the subsequent supply such as agent fees, maintenance fees (cost incurred after the first supply) incurred by the supplier will be considered as unrecoverable VAT as these costs are directly related to the exempt supply of the building.
Charitable buildings

The Guide provides that to be considered as charitable building, any building, or any part of a building should be specifically designed to be used by a charity and solely for relevant charitable activity.

Moreover, the guide defines “relevant charitable activity” as:

  • undertaken by the charity in the course or furtherance of its charitable purpose or objectives to carry out a charitable activity in the UAE, as approved by the Ministry of Community Development, or under the conditions of its establishment as a charity under Federal or Emirate Decree, or as otherwise licensed to operate as a charity by an agency of the Federal or Emirate Governments authorized to grant such licenses;
  • not for the purpose of profit or benefit to any proprietor, member, or shareholder of the charity.

As a result, 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 relevant charitable activity. The “first supply” includes a supply of the building by either sale or lease. But unlike for the case related to residential buildings, there is no time limit from the date of completion for charitable building during which the first supply must be made in order to qualify as zero-rated for VAT purposes.

Furthermore, any subsequent supplies of the building, either by sale or lease, shall not be zero-rated, as they will not qualify as the first supply of the building. Therefore, is subject to VAT at 5% on the basis that building is then considered to be for commercial purposes.
Bare Land

The Guide provides that supply of bare land is exempt from VAT, either by lease or sale. In line with this, any VAT incurred on costs related to the supply of bare land shall not be recoverable by the supplier.

However, the Guide specifically mentions that where a plot land is supplied which does not meet the definition of ‘bare land’, it shall be considered to be commercial land and therefore subject to VAT at the standard rate to be evaluated on a case by case basis.

For UAE VAT purposes, in order for land to be considered as “bare land”, none of the following must be present on top of the land:

  • Completed buildings;
  • Partially completed buildings; or
  • Civil engineering works
  • According to the VAT Guide, partially completed buildings is when the stage of the construction of the building has progressed beyond foundation level. Moreover, the land is covered by civil engineering works including roads bridges, and pipes used for mains water or power services, whether complete or partially complete.
    Commercial Real Estate

    The Guide defines Commercial real estate as 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.

    Hence, the supply of commercial real estate (sale or lease) is subject to VAT at the standard rate of 5%. As a result, any VAT on costs incurred in relation to the supply of commercial real estate shall be recoverable in full.

    Summary of the VAT liability of supplies of real estate:
    If you supply:
    VAT liability is…
    A commercial property
    5%
    A new residential property
    0% (subject to certain conditions)
    An existing residential property
    Exempt
    Bare land
    Exempt
    Covered land
    5%
    The first supply of a charitable building
    0%
    A subsequent supply of charitable building
    5%
    A property located within a Designated Zone
    Out of scope

    To know more about VAT on Real Estate, kindly contact us at info@bmsauditing.com.

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