What Happens When You Change the Permitted Use of a Building

The FTA has released a public clarification under UAE VAT law that concerns the VAT treatment of changes in a building’s lawful use as a solution to the problem.

Some circumstances in the UAE have a combination of sale and lease contracts, making establishing the appropriate VAT treatment more challenging. One of these features is a change in the usage of the building before or after the date of supply. 

This blog contains information about the UAE VAT treatment of the changes in the permitted use of buildings.

Vat Treatment of Sale of a Building in UAE

The building’s sale or lease might be standard rated, zero-rated, or exempt. Depending on the features of the structure at the time of supply, a transaction may be subject to VAT. If the structure is for commercial purposes, such as operating a hotel, any structure supply will attract VAT taxable at the standard rate of 5%.

Similarly, the first supply of a residential building within three years of its construction is taxed at zero VAT rates. And, the supply of the residential buildings is exempt from tax. 

Key Consideration for Change in the Permitted Use 

To identify a change in the permitted use of a building, you need to understand and consider a few parameters before we jump on the VAT treatment for the same. Let’s learn which are these considerations:

Identification of a Residential Building

A residential building is a structure or portion of a structure that serves as a person’s primary residence. VAT rule’s definition of a residential building excludes buildings used as hotels, motels, bed and breakfast establishments, and resorts.

Hence, identify whether your sale was a sale of a residential building or a commercial building.

Establish a Selling Date for the Building

The selling date is the earliest of the following dates: 

• The date when ownership passes from one person to another, generally the registration date. 
• The date on which the buyer got possession of the property.
• The date of payment to the seller

Selling Date in case of Building Lease

The date of sale in the event of a building lease can be the earliest date from among the following: 

• The lease’s tax invoice issue date. 
• The day on which the lessee’s right to use the building expires after 12 months.

What Happens When You Change the Permit?

After purchasing the building, the buyer can change the nature of its use. According to the VAT regulations, this change in the permitted use of a building will not affect the VAT treatment of the building’s previous sale. 

For instance, after selling a commercial building, the buyer later altered the building’s permitted use to residential. 

The sale of a building was taxed at a regular rate of 5% since it was a commercial building at the time of sale, but the subsequent change in its use did not affect the previous sale transaction.

Conclusion

Whether the purchaser alters the permitted use to lease or sell the premises to a third party as a residential building or hotel/serviced apartment, the VAT treatment of a building transaction in the UAE should stay the same.

How Can We Help?

At Flyingcolourtax, we have a dedicated team of tax experts who can guide you on UAE VAT compliance matters and explain every applicable VAT provision to you. Our qualified professionals can also assist you in accounting, auditing, company registration, and PRO requirements. 

Book your free consultationwith us to know more about the comprehensive services. 

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