VAT in the Hotels and Leisure Sector

UAE, Middle East

Earlier this summer, Anna Burchner (CMS Tax partner), Alexandra Tuck (CMS Tax senior associate) and Laura Whiteley (Lawyer) held a number of roundtable discussions with clients at our Dubai office on the introduction of VAT in the Gulf. Our first edition focussed on the real estate sector; this is the second instalment, focusing on the Hotels & Leisure sector.

If you would like to read our introduction to VAT in the UAE, which was outlined in the first edition, please click here.

Hot topics for the Hotels and Leisure Sector

Are hotel operator fees subject to VAT?

If the supply by a hotel operator is the making available of hotel accommodation and ancillary services, in a hotel which is located in the UAE, then the location of the supply of those services is in the UAE.  Accordingly, the supply to the guest will be subject to UAE VAT.  If a Dubai resident hotel operator provides similar services at a hotel in Saudi Arabia, that supply will be made in Saudi Arabia and will be subject to VAT in Saudi Arabia. The hotel operator will likely be seen as having a Saudi establishment (i.e. the hotel) and so will be required to register for Saudi VAT.

Are tips and gratuities subject to VAT?     

Tips and gratuities which are freely given are not subject to VAT.  Service charges, which are compulsory, will be subject to VAT.

Is a complimentary room a ‘supply’ for the purposes of determining whether VAT is applicable?

Where a room is provided free of charge, VAT is not chargeable if the hotel is receiving nothing in return. However, if the complimentary room is provided in the context of a wider transaction, then the supply for VAT purposes may be the providing of a conference room, for example. The VAT treatment of such matters is very fact specific and should be considered on a case-by-case basis.

Can an Owners Association (OA) register for VAT?

Yes. The current position is that the Federal Tax Authority are happy to register any OA whether or not the OA has a separate legal personality.

 

What is the VAT treatment of transport and entertainment packages?

If you are including pick-up and drop off to a venue, for example – this is arguably a standard rate supply with an ancillary (being the transport) included as an incidental supply, rather than a supply in its own right, which would be exempt (supply of local transport).

 

What is the position regarding Online Travel Agency (OTA) fees?

OTAs are services (being use and enjoyment) provided to hotel owners, so OTAs should charge hotel owners 5% VAT on such supplies. Whilst the standard rate should apply, it is sensible for hotel owners to review their contracts as they may provide specific VAT treatment, such as the consideration being inclusive of VAT.

 

What is the VAT positon on hotel operator fees?

If the services are delivered in the UAE then they will be subject to local VAT rules. If services are delivered outside of the UAE, then they will be accounted for under the reverse charge i.e. the UAE VAT registered company is made responsible to charge VAT on a reverse charge basis.

 

Is a brand license fee classed as a service?

Yes. Use of a brand will be subject to VAT at a standard rate of 5%.

 

What is the treatment of business entertainment expenses?

None recoverable. Businesses are generally prohibited to recover VAT on client/business entertainment expenses. The type of entertainment which is covered by the restrictions includes foods and drinks, which are not provided in the normal course of a meeting.

 

Are there any specific rules relating to place of supply in the hospitality sector?

For restaurants and hotels, the place of supply is where consumption takes place.

 

How long should VAT records be held on to?

VAT records in relation to property are required to be held for 15 years. VAT records relating to any other business are required to be held for 5 years. Electronic records are acceptable, meaning that original receipts etc. do not need to be retained. If a UAE VAT registered person is audited by the FTA and cannot produce the required VAT records, the FTA can levy penalties to that person.

Co-authored by Michelle Davies