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. One of these sessions focused on real estate.
The introduction of VAT is a hot topic and presents a number of challenges for doing business in the region. Engagement with the new regime is key for businesses to limit the impact and cost of VAT on their businesses. The roundtable discussions gave our clients a forum to discuss questions that have arisen in their businesses in the first few months following the introduction of the regime in the UAE and Saudi Arabia. Our discussions focused on the practicalities of operating VAT for businesses, a summary of which we set out below.
Is VAT relevant to my business?
VAT is a tax on the supply of goods and services. If you think that you may make any supplies then you need to consider whether you should be charging VAT on those supplies. If you receive supplies from others then it is highly likely that you will be charged VAT.
VAT is due in respect of any consideration given for a supply, this can be money or money’s worth. Where the consideration given is not money, we call this a “barter” transaction.
What type of supply am I making?
For the purposes of VAT, a “good” is any physical thing, for example: land, solar panels and books; and a “service” is anything else. There are three categories of VAT supply:
- Standard rated: this applies to the majority of supplies. The rate in the UAE and Saudi Arabia is 5%.
- Zero-rated: the rate of VAT applied is zero. Where this rate applies, the supplier charges VAT at the rate of 0% and is entitled to recover the input VAT it has incurred in making the supply. This rate of VAT is applied to supplies that the jurisdiction wishes to encourage, where it does not want the burden of VAT to fall on the end consumer; for example the development of residential accommodation.
- Exempt supplies: this rate applies to supplies on which the supplier cannot charge VAT and therefore cannot recover its input VAT related to such supplies; for example, financial services where no fee is charged.
What does “input” and “output” VAT mean?
These two terms are constantly used in the application of VAT and understanding what they mean is a crucial step to determining your VAT liability. “Input” VAT is the VAT you are charged on the supplies that are made to you. “Output” VAT is the VAT you charge on the supplies you make. Where you can charge “output” VAT, you can recover your “input” VAT.
What does composite and multiple supplies mean?
Where you supply more than one service or good to a person, for VAT purposes those supplies may be treated as one supply, a “composite” supply, or as a number of different supplies, “multiple “supplies”. The way to assess the type of supply you are making is to view your supplies from the perspective of the recipient. From an economic standpoint, are they purchasing a single supply or a number of different supplies? For example, the supply of an interest in a property and associated service charges will be treated as multiple supplies, whereas the supply of a serviced office may be treated as a single supply.
Where are my supplies made?
Where you make or receive supplies is key to determining the VAT liability for those supplies. For goods, the general rule is that the place of supply is where the goods are delivered. For services, the general rule is that the supply is made where the supplier has its residence but there are numerous exceptions to this general rule. A few particularly relevant exclusions for real estate are discussed below.
How do I deal with VAT in my contracts?
Unless you specifically state in a contract made after 1 January 2018 that the consideration payable is exclusive of VAT, the consideration will be deemed to include VAT. Where the consideration is inclusive of VAT, this means that the supplier cannot charge VAT in addition to the contractually stipulated consideration for the supply and the recipient can recover the input VAT element of the consideration paid.
The UAE tax authority has published guidance on the VAT treatment of contracts which span the implementation of VAT in the Gulf. For example, for contracts made before 1 January 2018, if the goods or services were not delivered until after 1 January 2018 then VAT applies, even if payment was made before 1 January 2018. In this case, if both parties to the contract are or are required to be registered for VAT and the recipient is able to recover input VAT, then the contract shall not be deemed to be inclusive of VAT, and the supplier will be able to charge VAT in addition to the price that was contractually agreed before 1 January 2018. This means the supplier will be able to charge the recipient VAT on top of the contractually agreed price, which the recipient will be required to pay and will be able to recover under normal rules.
Hot topics for the Real Estate Sector
Where is the place of supply for real estate?
For any real estate services/goods, the place of supply is where the property is situated, regardless of where the client is situated.
How are different categories of real estate goods and services treated?
Exempt: bare land (no civil engineering works or breaking land is to have occurred; it can include. land exclusively with underground pipes where nothing is above ground)
Zero rated: residential (intended and designed for human occupation e.g. care home, labour camps, student accommodation if primary place of occupation)
Standard (5%): commercial property
Exceptions: serviced apartments and hotel rooms are VATable at the standard rate of 5%
How can VAT be recovered on residential property?
In relation to developments of residential property, ensure the first supply (by lease or sale) is made within 3 years of completion of the building. Please note that it is only the first supply that is zero rated, i.e. the first invoice, with the ability to recover all input VAT directly related to the construction of the building. Subsequent supplies will be exempt for VAT purposes.
Are there any exceptions for UAE nationals in respect of real estate?
Yes. If UAE nationals construct their own property, they can recover all input VAT related to the construction of the property.
How are service charges treated?
Services connected with property are subject to VAT at the standard rate of 5%.
Should VAT be accounted for on rent free periods?
For legitimate rent free periods no VAT is applied as no supply is made.
How are Dubai Land Department fees treated?
Transfer fees are calculated on the VAT-inclusive price.
How can Owners Associations (OA) register for VAT?
The FTA are accepting any relevant documents and it is important that OAs do register, as they will be charging VAT to their members (provided the OA reaches the voluntary threshold of AED 187,500 turnover).
How are continuous property supplies treated?
For on-going, continuous services under a contract e.g. service charge or rent, VAT is triggered on the earlier of:
- when payment is received; or
- the due date for payment as stated on the invoice; or
- when the invoice is issued.
Therefore, if invoices are not paid, then the entity giving the invoice is still liable to pay VAT. In light of this, it is recommended that a demand for payment is issued, with a tax invoice sent following receipt of the payment (including the VAT element). The demand can include a clause stating that the tax invoice will be issued following receipt of payment.
How is the concept of a transfer of a going concern (TOGC) in the UAE treated?
The concept of a TOGC can be used where there is a transfer of a business generating revenue, which the buyer intends to continue after completion of the sale (for more than one VATable period) e.g. sale of a tenanted building. If the particular transaction qualifies, there is no VAT payable as the transfer is treated as being outside the scope of VAT and therefore no cash flow issue (provided both seller and buyer are registered for VAT).
Who accounts for VAT?
For transfers of commercial property in the UAE, the buyer has to account for VAT. The buyer provides their unique tax reference number to the Dubai Land Department and then the buyer can reclaim the tax element from FTA (after the VAT has been paid directly to the FTA, not the seller).
On supplies of property under leases, the landlord accounts for the VAT.
How are capital assets treated?
Where more than AED 5 million of capital expenditure is incurred on a property which is used to make taxable supplies, the related input VAT is recoverable. This recovery is subject to a ten year clawback period if the property ceases to be used to make taxable supplies under the capital asset scheme. On the transfer of a property as part of a TOGC, the buyer will inherit the seller’s position under the capital asset scheme.
Should VAT be charged on retentions?
A retention payment is a separate supply. The general time of supply rules must be applied. It is possible to avoid VAT becoming due to the FTA on the amount retained by the recipient of the construction services under contract as a retention payment. This can be achieved where the contract provides that the construction project is not complete/signed off/accepted until after the retention period. In this case, the VAT point in respect of the amount of the retention payment will be delayed until the earlier of:
- the time the retention payment has been made; or
- the date that the work has been signed off as complete; or
- the date the tax invoice has been issued.
How are tender bonds treated?
The bond is not consideration for a supply, therefore VAT is not applicable. However, whoever provides the facility should charge VAT on their fee for providing the facility.
How are supplies under construction contracts treated?
The date of supply is the earlier of the receipt of payment, completion of services, or the date of the invoice. If a recipient of services pre-paid for services in 2017 that are provided in 2018, the recipient must pay VAT on the portion of the contract completed following 1 January 2018 (provided that the contract deals with VAT accordingly)..
How are invoices for consultancy services treated?
Invoicing for general consultancy services is subject to VAT depending on the place of supply. If the recipient of the service is based and receives the supply in another implementing state of the GCC and the recipient is also:
- Registered for VAT in that other implementing GCC state, then the place of supply will be the country of the recipient and UAE VAT will not be due (the recipient will be obliged to account for the VAT under the reverse charge mechanism)
- Not registered for VAT in that other implementing GCC state, the place of supply will be UAE and the supplier must charge the recipient UAE VAT.
The VAT treatment of specific property related consultancy services is dependent on the location of the property.
How long should VAT records for property be held on to?
VAT records should be held for 15 years by property firms (as compared to the usual 5 for years for other sectors). 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.