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30 April 2020
Change in the permitted use of a building
 
The FTA has recently issued a public clarification under UAE VAT law that discusses the VAT treatment with respect to change in the permitted use of a building.
Sale of a building may be zero-rated, standard-rated or exempt from VAT, depending on the nature of the building and the permitted use thereof at the date of supply. We have summarised below the gist of the key UAE VAT positions discussed in the clarification. The same is divided into two parts –
    
  1. Taxability in relation to ‘Residential Building’ as per UAE VAT law
  2. Taxability in relation to change in the permitted use of building subsequent to sale
Taxability in relation to ‘Residential Building’ as per UAE VAT law –
A. Legal Provisions under Decree - Law
  • Article 2 read with Article 3 (Scope of Tax and Tax Rate)
    5% VAT shall be imposed on every taxable supply made in UAE by a ‘Taxable Person’, unless the supply qualifies for zero-rating or exemption under the provisions of Decree-Law.
  • Article 1 (Taxable Person) ‘Taxable Person’ is defined as any person who is, or is required to be, registered for VAT in the UAE.
  • Article 25 (Date of Supply - Sale of a building)
    The date of supply is earlier of the following dates –
    1. Ownership of the building is transferred to the purchaser (as evidenced by the registration at the relevant government entity);
    2. On which the purchaser took possession of the building;
    3. The payment was received in respect of the supply of the building; or
    4. A Tax Invoice was issued in respect of the supply of the building.
  • Article 26 [Date of Supply - Lease of the building (with either periodic payments or consecutive invoices)]
    The date of supply is earlier of the following dates –
    1. Any Tax Invoice is issued in respect of the lease of the building;
    2. Any payment is due as shown on the Tax Invoice;
    3. Payment is received in respect of the lease of the building; or
    4. 12 months lapsed from the date the right to use the building was provided to the lessee.
  • Article 19 of the Executive Regulations (VAT due as on the date of supply) –
    1. Where VAT is due because a payment is made or a tax invoice is issued, the VAT is only due to the extent of that payment or amount stated in the tax invoice;
    2. VAT can be accounted for on the amounts as they are billed or paid.
  • Applicability of VAT in transactions relating to Residential Building
    Sr. No Reference Taxability Conditions to be fulfilled
    1
     
    Article 45(9) Zero-rated
     
    (i) the first supply of a residential building;
    (ii) within three years of completion;
    (iii) irrespective of whether the building is sold or leased,
    (iv) Irrespective of whether the same is sold/leased in part or as a whole
    2 Article 45(11) Zero-rated (i) the first supply of building;
    (ii) converted from non-residential to residential through sale or lease
    (iii) according to the conditions specified in the Executive Regulation of this Decree-Law.

    Article 43(1) of the Executive Regulations specifies that the supply of residential buildings is exempt - unless it is zero-rated provided
    (i) where the lease is more than six months; or
    (ii) the tenant of the property is a holder of an ID card issued by the Federal Authority for Identity and Citizenship
    3 Article 46(2) Exempt (i) supply of residential buildings;
    (ii) through sale or lease;
    (iii) unless the supply qualifies for zero-rating under Article 45(9) and 45(11) of the Decree-Law

On a reading of the above, it is clear that the supply of ‘residential building’ is ‘Exempt’ under the UAE VAT law unless provided otherwise.

B. Legal Provisions under Executive Regulations
  • Meaning of Residential Building
    As per Article 37 (1) includes As per Article 37 (2) excludes
    (a) any building or part of a building that the person occupies, or that it can be foreseen that a person will occupy, as their principal place of residence
     
    (a) ………………………….
    (b) any building that is used as a hotel, motel, bed and breakfast establishment or hospital of the like;
    (b) ………………………… (c) a hotel apartment for which services, in addition to the supply of accommodation are provided.
    (d) ………………………..
Taxability in relation to change in the permitted use of building subsequent to sale
The Public Clarification clarifies the VAT treatment of the sale of a building in case wherein there is change in the permitted use of building by the purchaser.
  • As per this clarification, the supply of an apartment or any other unit within a building is treated as a supply of a ‘building’;
  • Sale of a building is a single indivisible supply on the date of supply as determined under Article 25 of the Decree-Law;
  • Since VAT is a transaction-based tax, the VAT treatment shall be determined independently at each date of supply.
  VAT treatment to be decided depending upon the use of building as on date of supply
  1. Any change in the use of the building before the date of supply to be disregarded for the purpose of determining the VAT treatment. The permitted use as on the date of supply is to be considered;
  2. Subsequent change in the permitted use of the building shall not affect the impact of the VAT treatment of the preceding sale of the building

The scenarios as discussed in the clarification has been summarized in the table for ease of reference-
In relation to the sale of ‘Residential Building’ as defined above

Legs of Transaction Type of Sale VAT treatment
First sale
 
Supply of Residential Building
  1. If it is the first supply of the building within three years of completion, the supply may be zero-rated,
  2. Otherwise, the supply might be exempt from VAT under Article 46(2) of the Decree-Law;
Second sale There are two possible scenarios of sale by Purchaser in the First Sale
(i) Possibility 1
 
Lease or Sells to a third party as a principal place of residence This supply is exempt from VAT under Article 46(2) of the Decree-Law;
(ii) Possibility 2
 
Amend the permitted use to lease or sell the building as a serviced or hotel apartment to a third party This supply is subject to 5% VAT if the purchaser (owner of the building) is a taxable person, i.e., registered for VAT or required to be registered for VAT
 

In relation to the sale of ‘Non-Residential Building’-
Non-residential building refers to any building not falling within the definition of a ‘residential building’, for example, hotel/serviced apartments

Legs of Transaction Type of Sale VAT treatment
First sale
 
Supply of Non-residential building This supply is subject to 5% VAT if the seller is a taxable person
Second sale There are two possible scenarios of sale by Purchaser in the First Sale
(i) Possibility 1
 
Amends the permitted use of the building and leases or sells the building as a principal place of residence to a third party, i.e., as a ‘residential building.’ This supply is exempt from VAT under Article 46(2) of the Decree-Law;
(ii) Possibility 2
 
Leases or sells the building as a serviced/hotel apartment to a third party This supply is subject to 5% VAT if the purchaser (owner of the building) is a taxable person.
Our Comments
FTA has provided detailed clarifications in relation to residential buildings. Further, the liability of VAT in case of sale/lease of the building has to be determined considering the permitted use as on the date of supply.
The public clarification can be checked here.
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