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In a move that will be welcomed by both the real estate sector and VAT practitioners, the Federal Tax Authority (FTA) has published two items of note to the VAT treatment of real estate transactions:

  • The VAT Real Estate Guide VATGRE1 has been updated to reflect the FTA’s views on a number of topics, including Musataha agreements, the exemption for bare land and the VAT status of Owner’s Associations.
  • Public Clarification VATP018 clarifies the FTA’s position on the consequences arising from a change in permitted use since a building has been acquired.

VAT Guide: Real Estate VATGRE1 – update to guide

FTA VAT Real Estate Guide VATGRE1 covers a wide range of matters across the spectrum of the Real Estate Sector.

As with many VAT Guides, this document is updated from time to time to reflect latest FTA thinking and to expand its coverage to new issues that have come to attention. Helpfully, the FTA provides a summary of the latest updates and amendments in Section 15.

In summary, the updates relate to:

  • The supply of accommodation in labour camps – clarification that input VAT incurred by employers related to accommodation that is not necessary for an employee to perform their role is not recoverable (see section 3.6).
  • A discussion of what the FTA considers to be a “partially completed” building – clarification that temporary movable structures placed on bare land will not cause the land to be considered covered by buildings or civil engineering works and hence cease to be “bare land” for VAT purposes (see section 3.6) .
  • The development of leased bare land – clarification on the VAT treatment of the supply of leased land, where the land becomes partly or completely covered by buildings or civil engineering works, depending on the application of particular “date of supply” rules. (see section 5.6)
  • Importantly, the updated guide now expresses the FTA’s views on the treatment of supplies of land under Musataha agreements, including whether that is a singular supply or an on-going periodic supply, which has particular relevance to such agreements entered into prior to commencement of VAT on 1 January 2018 (see section 5.6).
  • VAT recovery of repair and maintenance costs – clarification on the use of the floor space special method of input VAT apportionment to be used for recovery of residual input VAT where the standard method of input VAT apportionment is not appropriate (see section 7.3).
  • Management Entities – the section on Owners’ Associations is now updated to include Management Entities and, importantly, will settle some unnecessary confusion in the market that these entities are in fact required to register for VAT in many circumstances (see section 8).
  • Outlining a new process for submission of New Residence Refund Requests – confirmation that all applications for refunds for New Residences be made through the FTA e-Services Portal (see section 13.4).

For further information, please refer to https://tax.gov.ae/-/media/Files/EN/PDF/Guides/Real-Estate-Guide-VATGRE1---EN---26-04-2020.pdf

VAT Public Clarification VATP018 “Change in the permitted use of a building”

FTA Public Clarification VATP018 “Change in the permitted use of a building” was released on 27 April 2020. VATP018 clarifies the FTA’s position on the VAT liability of a subsequent supply of a building by a purchaser where there has been a change in permitted use since the building was acquired.

That is, does a subsequent supply mean that the VAT treatment of a prior sale needs to be revisited. In short, the FTA quite correctly concludes that it does not.

The sale of a building by a seller will be subject to VAT depending on the use of that building at the time of supply (exempt or zero rated for residential buildings and standard rate for non-residential buildings). Where the purchaser changes the permitted use of the building prior to making an onward supply by way of sale or lease of the building, the subsequent supply of that building will depend on the use of the building at the time of that subsequent supply (standard rate for non-residential and exempt or zero rate for residential).

Importantly, the FTA makes it clear that the subsequent supply is completely separate and distinct from the original purchase and its VAT liability is solely dependent on the use of that building when it is subsequently sold or leased.

The VAT liability for taxable persons of the initial sale and subsequent supply following change of permitted use is summarized below; the usual definitions in the UAE VAT legislation apply to residential and non-residential buildings:

Use of building at time of sale and VAT liability of the supply

Use of building at time of subsequent supply and VAT liability of the supply

Non-residential:

5%

Residential:

0% - if first supply of building within 3 years of completion

0% - if first supply of building converted from non-residential to residential within 3 years of completed conversion and building not used for residential purpose within 5 years prior to conversion work commencing

Exempt – if the building does not qualify for 0% rate as above

Residential:

0% - if first supply of building within 3 years of completion

0% - if first supply of building converted from non-residential to residential within 3 years of completed conversion and building not used for residential purpose within 5 years prior to conversion work commencing

Exempt – if the building does not qualify for 0% rate as above

Non-residential:

5%


For further information, please refer to https://tax.gov.ae/-/media/Files/FTA/links/Public-Clarification/VATP018---Real-Estate---Change-in-permitted-use-of-a-building.pdf

Should you have any queries with regard to the updated Real Estate guide or VATP018, please get in touch with your usual KPMG contact.