In the UAE, selling and leasing buildings is widespread because the real estate sector is very prominent in the region. As per the VAT guidelines, the commercial buildings and their subsequent supplies are subject to a standard VAT rate of 5%, while the residential towers and the following supplies are exempt from VAT.
One scenario is commonly encountered wherein there is a mixed nature of the sale or lease contracts, thus making the proper VAT impact calculation challenging. This blog discusses information regarding the VAT impact on change in the permitted use of a building in the UAE.
The tax consultants in the UAE available in the VAT registration UAE will help you identify these changes and their impact on your business’s VAT recordings.
Things to be Considered While Determining the VAT Treatment on the Sale of a Building in the UAE
To determine the VAT impact on the sale of a building, some significant factors are to be kept in mind. These are the nature of the usage of the building and the date of supply. The reason behind this is that the building is always considered a single indivisible good, and the only thing that matters here is the current state of usage of the building at the time of the supply.
Therefore, as per this rule, if the building is used for commercial purposes on the collection date, the standard VAT rate would be applicable. On the other hand, if the building is being used for residential purposes, the supply will be either zero-rated if it is the first supply within three years of its construction or exempted.
The tax consultants in the UAE can be contacted to get a deep insight on this.
VAT Implications of Change in the Permitted Use of a Building in the UAE that Happens once the Building has Been Sold
Once sold, the purchaser might change the nature of the use of the building. He may change a residential building to a commercial one or vice versa. As per the VAT rules, this change will not affect the VAT treatment of the initial sales of the building.
For example, suppose a commercial building was sold, and the purchaser, later on, changed the use of the building for residential purposes. In such a case, the sale of the building was taxable at a standard rate of 5% and the subsequent change in the use of that building will not affect the previous sale transaction.
Identifying a Residential Building for Calculating VAT Implications
A residential building is a building or a part of a building being used or intended to be used by a person as their primary place of residence. The hotels, motels, hotel apartments, and bed and breakfast places are excluded from the category of residential buildings as per the VAT regulations.
The date of supply here plays an important aspect. To determine the date of collection for sale of a building, the earliest date out of the following is to be considered-
- The date on which the building ownership is transferred to the purchaser.
- The date on which the purchaser has taken possession.
- The date on which the seller receives the payment.
- The date on which the tax invoice for sale was issued.
Similarly, in the case of a lease, with either periodic payments or continuous invoices, the date of supply is the earlier date out of the following-
- The date on which the tax invoice was issued for the lease.
- Any payment that’s due is shown in the tax invoice.
- Price has been received concerning the lease of the building.
- Twelve months have elapsed from the date the facility’s right to use was provided to the lessee.
Exceptional Cases to Measure the Impact of VAT on the Change in the Permitted Use of a Building in the UAE
If the seller sells a residential building to a purchaser who subsequently leases or resells the building to a third party, two separate supplies happen. That is-
- First supply- the seller has sold the residential building to the buyer on the date of supply mentioned in the general date of supply rules. If this happens to be the first supply of the building, then the supply is zero-rated or exempt from VAT.
- Second supply: If the supplier leases or sells the building as a principal place of residence to a third party, this supply is also exempt from VAT.
- Lastly, the purchaser might 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 a standard VAT rate of 5% if the purchaser is a taxable person, i.e., he is registered for VAT with the FTA.
If the seller sells a non-residential building to a purchaser who then leases or sells the building to a third party, then two separate supplies occur: –
- First supply- the seller supplies the building to the buyer on the date of supply as determined under the general time of supply rules. This supply is subject to 5% VAT if the seller happens to be a taxable person.
- Second supply- If the purchaser amends the permitted use of the building and leases or sells the building as a principal place of residence to a third party, then this supply becomes exempt from VAT.
- Lastly, if the purchaser leases or sells the building a hotel or serviced apartment to a third party, then this supply is again subject to 5% VAT if the purchaser is a taxable person.
How Can Vat Registration UAE Help You?
Therefore, considering the above discussion, the VAT treatment of the sale of a building is independent of the subsequent supply thereof by the purchaser and will remain the same, irrespective of whether the purchaser amends the permitted use to either lease or sell the building to a third party as a residential or hotel/serviced apartment.
We at VAT registration in UAE can help you determine the VAT impact on change in the permitted use of a building in the UAE. Contact us today, and we shall be happy to assist you with your queries.
Read also: VAT On Real Estate Market In UAE