IS VAT ON REAL ESTATE DIVIDED INTO TWO CATEGORIES IN THE UAE?
VAT considerations for businesses dealing with real estate in the UAE can be complex and difficult to manage, reflecting the industry’s complex supply chains, ownership, and payment structures.
Businesses in the United Arab Emirates (UAE), home to some of the known, world’s largest, and most complex real estate projects, are now starting to feel the impact of the tax.
The UAE’s VAT regime has many property-specific regulations that require companies to conduct a detailed analysis of their contracts and transactions to assess the correct VAT treatment, the time of accounting for VAT if it is due, the person responsible for reporting any VAT payable; the right to recover VAT on expenses; documentation and record-keeping requirements; and compliance obligations.
The UAE VAT regime is relatively new, effective January 1, 2018, and some aspects of the law are still considered ambiguous or can be interpreted. The maturity of the regime and a consistent understanding of its application will come over time as the Federal Revenue Agency (FCA) makes more in-depth technical explanations privately available to taxpayers and taxpayers. Issue more general guidance. VAT treatment for land or building use change. There are several different VAT treatments for real estate transactions under UAE VAT law. It is important for the supplier to assess the circumstances, facts, and purpose of the land or building at the time of delivery to make sure that the correct VAT treatment is applied:
- 5%, 0%, or tax free.
In the previous version of the Property Guidelines, at point 5.6, AFC provided its position on how a supplier should handle asset transactions for VAT purposes when there is a change in the use of assets.
The specific example provided involves the lease of ‘bare’ land, which is then developed for VAT purposes. In the past, the view was that regardless of the “supply date”, any vacant land lease that subsequently became construction land during the lease period would require the supplier to make a VAT adjustment to the property. With the right part, from the exemption from delivery of vacant land to construction land subject to 5% VAT. Following the revision of the Real Estate Guidelines and the publication of a public explanation (8 pages / 449 KB PDF), AFC reaffirmed its position as follows:
- the supply of real estate (vacant or built, sold or rented, commercial or residential) as determined by the supplier on the date of supply according to the nature of the land or building at that time;
- A subsequent change, like the land or building, or a change in the intended use of the customer or tenant, will not affect the VAT treatment of the previous delivery;
- If another Tax Consultant point occurs, the supplier must reassess the condition of the land or building and its supply at that time and apply the correct VAT treatment.
The revision of its position on this technical point is warmly welcomed and matches the interpretation with that of many experienced VAT experts in the region.
THE FTA PROVIDES SEVERAL EXAMPLES, INCLUDING:
- The lessor leases vacant land that the lessee converts into service land during the lease period. In such cases, if a tax point is activated before the land is converted to construction land. For example, Q1 rent is paid in advance before development.
- There will be no change to the original treatment of the property. The lease contract is a contract to lease vacant land with tax exemption.
- If a tax point is activated after the land is converted to construction land, for example, Q2 rent is paid after development. This rent will be treated as subject to the same 5% VAT as the land lease. build;
- Selling apartments as main private houses is exempt from VAT 0%. If the customer subsequently leases the property with additional services in the form of a “serviced apartment” subject to 5% VAT, this will not affect the previously applied VAT treatment;
- The sale of a building used as a support facility is subject to 5% VAT. However, after that, if the customer leases the building to a tenant as a private residence without services, which is exempt from VAT, this will not affect the previous VAT treatment. AFC also clarified that regardless of payment milestones agreed under the Musataha agreement (a type of long-term lease), the “supply date” for VAT purposes of the complete supply in part of the contract should be deemed to take place.
FRONT, SIMILAR TO THE OUTRIGHT SALES.
Therefore, any subsequent change in the condition of the land or change in the lessee’s intended use will not affect the VAT treatment.
The change in interpretation of this FTA after more than two years since the implementation of VAT in the United Arab Emirates. It demonstrates that the regime is still young and needs time to stabilize and mature. Businesses should keep a close eye on the enactment of FTAs, as early identification of VAT issues will always lead to faster resolution and reduction of associated costs.
VAT TREATMENT FOR ACCOMMODATION IN LABOR CAMPS
Employers in the UAE construction industry and other industries often provide accommodation for these workers. These accommodations are often referred to as “labor camps” and can take many forms, including mobile shelters and apartment buildings. Sometimes it may come with additional services such as laundry or cleaning services.
Accurate determination of the overall VAT consequences associated with labor camps requires examining each case-by-case situation basis, identifying the exact facts surrounding the accommodation offer, and applying different rules outlined in the UAE VAT law.
THE FIRST TEST IS WHETHER PROVIDING LABOR CAMP ACCOMMODATION FOR EMPLOYEES HAS:
- The employer delivers goods to the employee for VAT purposes; Or
- General business expenses.
For the offer to be recognized for VAT purposes and thus fall within the scope of VAT UAE, it must be taken for reconsideration – e.g., direct fees to employees, deductions from employee wages, or housing allowance deduction due to the employee. When employees consider providing accommodation in exchange for accommodation, the second criterion is whether the accommodation qualifies as “residential” or “commercial.”
THIS IS IMPORTANT BECAUSE:
- The handover of “residential” real estate is subject to 0% VAT for the first delivery, sale, or rental within three years of completion and is exempt from VAT on all other transactions;
- “commercial” deliveries are subject to 5% VAT.
Residential property is strictly regulated in United Arab Emirates law, including examples of what will or will not qualify for VAT purposes. Anything ineligible will automatically be considered commercial and subject to 5% VAT.
The most relevant conditions for determining whether a workplace accommodation qualifies as a residence are:
- must be the employee’s primary residence;
- it must be fixed on the ground and cannot be moved; And
- must not be a “service provider” accommodation that provides
Non-ancillary services other than accommodation – this includes hotels, motels, and similar accommodations.
The AFC Public, Workplace Housing Clarification, guides when AFC considers accommodation services to be “accidental” and therefore does not affect the residency status of real estate.
All Employers should assess the above conditions for the qualification of the property as residential, which includes the level of additional goods and services that are to be supplied to employees, whether there are any separate charges for any of these. whether or not the services are ‘incidental’ which are important in order to determine the correct VAT treatment of the certain provision of accommodation to staff.
Where employees provide no consideration in return for labor camp accommodation, all costs associated with the provision of these benefits to staff should be assessed in the normal manner to determine if they are deductible by the employer in its periodic VAT returns. In this regard:
- The employer should have obtained and retained a valid VAT invoice for the costs on which VAT has been incurred in connection with the labor camp;
- The employer should have paid the relevant vendor invoices or have a genuine intention to pay within six months till the end of the credit period agreed with each vendor;
- The types of costs should be separate from ‘blocked VAT’ items under UAE VAT legislation.
SPECIFICALLY, THERE SHOULD BE:
- A legal obligation for the employer to provide the accommodation and any additional goods or services to the employee under an applicable labor law;
- A contractual obligation or published internal policy to provide the accommodation and the additional goods or services to the employee, it can be normal business practice to do so, and it is required for the employee to perform their role; or
- The provision of the accommodation and additional goods or services requires the employer to account for sales VAT under the ‘deeming’ provisions within the UAE VAT regime.
Employers should carefully assess employee accommodation in labor camps and any associated goods or services provided to employees under the above tests to determine their entitlement to recover VAT on these costs. Otherwise, this VAT will become a real cost to the company and will affect the results of the company.
HANDLING VAT ON VACANT LAND
The supply by sale or rental of vacant land is exempt from VAT in the United Arab Emirates, which means that no VAT is charged on sale, and the supplier is not entitled to recover VAT incurred for expenses, related fees.
Depending on the transaction in question and the parties to the transaction, there may be a natural preference for land that is treated as exempted bare land – for example, when there are no high associated costs and the customer does not benefit from the full deduction of input VAT; or for it to be treated as taxable construction land – for example, when there are costs involved that have incurred VAT. However, making this decision is not at the discretion of the parties. Instead, they must assess the true condition of the land at the time it was supplied.
UAE VAT law offers almost no guidance on determining if the land is “empty” or “developed” for VAT purposes. Instead, it simply shows that an empty piece of land is not covered by finished buildings, partially completed buildings, or civil engineering works.