UAE VAT Update on Change in the Permitted Use of a Building
Supplies involving building, whether they be sales or leases, are one of the common types of business transactions in UAE mainly due to the prominence of the real estate sector in the region. Apart from the frequently encountered residential type of supplies, there are scenarios that involve a mixed nature of sale or lease arrangements which may bring up complexity in determining the appropriate VAT treatments. One of such factors that may arise is change in the use of a building and it is important for the applicable parties to be aware of its VAT implications. In this blog we will discuss VAT impact on change in the permitted use of a building.
What are the possible VAT treatments on supply of a building in UAE?
A sale or lease of a building can be standard rated, zero rated or exempt based on the nature of its use as on the date of the supply. If the building is used for residential purposes, the first supply of the building within three years of its construction shall be zero rated. Thereafter any sale or lease of that building will be exempted from VAT, provided the usage of the building is still as a residential property. Where the building is used for commercial purposes, such as for example as running a hotel, any supply of the building, whether it be sale or lease, shall be taxable at standard rate of 5%.
Considerations to be made on determining the VAT treatment on a sale of a building
To determine the VAT treatment on sale of a building, the major factor to be considered is the nature of use of the building as of the date of the supply. This is because a building is considered as a single indivisible good and what matters is the current state of usage when the supply happens. Hence the standard rate of tax will apply, if the building is used for commercial purpose on date of the supply and if used as a residential space, the supply will be either zero rated if it is the first supply within 3 years of its construction or exempted.
VAT implications of change in its permitted use that happens after sale of a building
There can be situations where after a sale of a building the purchaser changes the nature of use of the building. As per the VAT regulation this change will not alter the VAT treatment of the preceding sale of the building. For example, a commercial building was sold and the purchaser later changed the permitted use of the building for residential purposes. The sale of the building was taxable at a standard rate of 5% and the subsequent change in use of the building will not have an impact on the previous sale.
How to identify a residential building?
Residential building is a building or a part of a building which is used or intended to be used by a person as their principal place of residence. The VAT regulation specifically excludes buildings used as hotel, motel, bed and breakfast places and hotel apartments from the definition of residential building.
How to determine the date of supply for sale of a building?
When a sale of a building happens, the date of the supply can be identified as the earliest date among the following:
- The date on which the ownership is transferred which is mostly the registration date
- Date on which the purchaser got the possession of the building
- Date on which the seller receives the payment for the sale
- Date on which the tax invoice for the sale was issued
How to determine the date of supply for the lease of a building?
With respect to lease of a building, the date of supply can be identified as the earliest date among the following:
- Date on which tax invoice was issued for the lease
- Any lease payment due date as per the invoice
- Date on which the lease payment was received by the lessor
- Date when 12 months lapsed from the date the lessee got the right to use the building
CDA can assist you in determining VAT treatments on supplies involving buildings
It is always recommended to consult with VAT experts in the region for making informed decisions on VAT treatments relating to your business transactions. CDA has specialists who have experience in providing VAT services in UAE to enterprises with buildings as invested assets. We have experience of analyzing various transactions involving supply of buildings in the UAE. Our VAT experts can guide you in interpreting the provisions of VAT regulation as applicable to your specific scenarios in a diligent and systematic manner to arrive at the right tax treatments. We are happy to discuss further with you on a free one-hour consultation call and also share with you the best practices of the region.