Eligible expenses for input tax claim relating to building a residence by UAE nationals

Along with the provisions of tax rules in UAE, FTA has included some relaxations and refund schemes for certain transactions by eligible individuals. Tax refund scheme for construction of residence is one of them.

What are the implications of input tax recovery option on building a residence in UAE?

The recovery option for input VAT on expenses incurred for constructing residential buildings is available for individuals who are nationals of UAE and who hold a Family Book. The guidance from FTA prescribes conditions to be met to confirm the eligibility of expenses for which input tax claim can be made by a UAE national.

Can input tax claim be made by UAE national on any type of building?

The regulation specifies that the refund claim can be made only for the expenses relating to construction of a new residence. The term ‘residence’ is further defined as the building intended to be and has the basic facilities of a private home and hence this refund option is not applicable to any commercial buildings. Also, input tax claim cannot be made to any additional modifications made to any existing residual building which is already completed. If a completely separate building is constructed on the same plot where already a residential building is existing and if the new building getting constructed qualifies the definition of residence, then input tax claim can be made for this separate new building.

Example 1: A UAE national owns a villa and now a recreation room is getting constructed as a separate structure in the same plot of the villa. In this case, the recreation room does not qualify the criteria of residence and hence the refund option for VAT incurred on its construction is not available. 

Example 2: A UAE national owns a villa and now a new house is getting constructed as a separate structure in the same plot of the villa. In this case, the new house qualifies to be a residence and hence VAT incurred on its construction can be recoverable.

Which all expenses relating to building a residence in UAE are eligible for tax refund?

Once the eligibility of the residence being constructed is confirmed under this refund scheme, the nature of expenses is to be further analyzed to ensure that they fall under the specified list of category of expenses. The allowed expenses include the cost of building materials and other service fees directly incurred for the construction of the residence. The applicant of the refund request shall ensure that the expenses, for which the input tax claim is made are directly related to the construction of an eligible new residence and the same can be evidenced. To know more about the steps involved in applying for tax refund, please refer to our article on “How UAE nationals get VAT refund on building new residences?”

Why proper tax accounting is important for ensuring compliance with tax recovery rules?

It is essential to apply correct tax treatments and implement appropriate tax accounting to comply with the regulatory requirements and to ensure timely processing of tax refund claims. The identification and classification of expenses into right categories are again crucial to validate the eligibility for a tax refund claim. Inaccurate records may lead to rejection of refund applications, prevent the possibilities of tax recoveries and may even result in penalties due to non-compliance. Hence tax accounting has to be performed with utmost care and efforts shall be made to implement adequate controls to ensure the accuracy and completeness of records.

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Hope you have a clear understanding of the eligible expenses for input tax claim relating to building a residence by UAE nationals. For more details, feel free to contact us. CDA can assist you with tax-related activities, which adds value to your functions.