Impact of VAT on Real Estate

UAE introduced VAT on Supply of Good and Services from 1st January 2018, its effects are also applicable to supplies of real estate made in the UAE.

Let us understand VAT treatment of supplies of real estate as well as various common transactions which occur within the real estate sector. Real estate is generally considered to be property consisting of land or buildings. Supply of real estate includes sale, lease, transfer of rights of real estate property.

For VAT purposes, a supply of real estate is treated as a supply of goods as supply of real estate involves the transfer of ownership of the real estate or the right to use the real estate to another person.

Chargeability of VAT depends on the type of supply of real estate, accordingly following types of Taxes will be levied:

• Exempt : No VAT will be levied
• Zero Rated : VAT will be levied @ “0%”
• Standard Rated : VAT will be levied @ “5%”

VAT on Residential Buildings

Residential Building is defined as building is a building which is intended and designed for human occupation including residential accommodation for students, school pupils, armed forces, police, Orphanages, nursing homes and rest homes but does not include:

• Any place that is not a building fixed to the ground and which can be moved without being damaged;
• Any building that is used as a hotel, motel, bed & breakfast establishment, or hospital or the like;
• A serviced apartment for which services in addition to the supply of accommodation are provided;
• Any building constructed or converted without lawful authority.

First Supply of Residential Building:

The first supply of a residential building will be zero-rated for VAT purposes. This means that the VAT incurred on costs relating to the first supply of the building should be recoverable in full. The ‘first supply’ includes a supply of the building by either sale or lease, but it must be made within 3 years of the buildings’ completion date

Subsequent supplies of residential buildings:
The supply of a residential building other than the first supply is exempt from VAT. Even if the subsequent supply of residential building is made within 3 years of building completion the supply will be Exempted from VAT.

VAT on Charitable Buildings:

A charitable building means any building, or any part of a building, that is specifically designed to be used by a charity and solely for a relevant charitable activity. A charity is a society or association of public welfare, which does not aim to make a profit. Only those charities which are listed in a decision of the cabinet regarding Designated Charitable Bodies shall be eligible to use a building for a relevant charitable activity.

First Supply of Charitable Building:
The first supply of a building, or any part of a building, is zero-rated if the building was specifically designed to be used by a Charity and solely for a relevant charitable activity. There is no time limit from the date of completion during which the first supply must be made in order to qualify for zero-rating in such cases

Subsequent supplies of charitable building:
The supply of a charitable building other than the first supply, is subject to VAT at the standard rate. This is on the basis that the building is then considered to be for commercial purposes

VAT on Bare Land:

Bare land is land which is not covered by either completed, partially completed buildings or civil engineering works. The phrase “land” means any area on the surface of the earth, including any trees, plants or natural objects in, under or on top of it.

The supply of bare land is exempt from VAT. This includes the supply by either lease or by sale. As a result, any VAT on costs associated with the supply of bare land e.g. legal fees or agents fees, shall not be recoverable by the supplier.

VAT on Commercial Real Estate:

Commercial real estate is any land or buildings, which are not one of the following:

• a building designed as a residential building or number of residential buildings;
• a building intended for use by a charity for a relevant charitable activity; or
• bare land.

The supply of commercial real estate is subject to VAT at the standard rate of 5%. The supply of commercial real estate includes sale or lease. VAT is therefore due on the total consideration received for the supply of commercial real estate. Where the consideration for the supply is payable by instalment, VAT will be due on each instalment paid.

VAT on Mixed use developments:

A mixed use development is a building or plot of land which has clear and distinct areas which are put to different uses which would have a different VAT treatment when supplied. Where a distinct part of a mixed use development is supplied, the VAT liability shall be treated as exempt or zero rated or standard rated depending upon the distinct part VAT applicability.