Issue:
The supply of a building may be standard-rated, zero-rated or exempt from VAT, depending on the nature of the building and the permitted use thereof at the date of supply.
Since VAT is a transaction-based tax, the VAT treatment shall be determined independently at each date of supply.
This Public Clarification clarifies the VAT treatment of the sale of a building and the subsequent use thereof by the purchaser.
Summary:
The sale of a building constitutes the supply of a single indivisible good at the date of supply. If the purchaser subsequently changes the permitted use of the building, it does not impact on the VAT treatment of the preceding sale.
Consequently, where a building was sold as a serviced/hotel apartment and the purchaser subsequently change the permitted use of the building to residential use only, the preceding sale will remain subject to 5% VAT whereas the purchaser should not account for VAT on the subsequent exempt supply.
If a building was sold as a residential building but the permitted use is subsequently changed to use as a serviced/hotel apartment, the VAT treatment of the original sale will remain the same regardless of the purchaser’s subsequent use of the building, i.e. exempt from VAT, except if it was the first supply of the building, in which case the supply may be zero-rated. After the permitted use is changed, the purchaser will have to account for 5% VAT on the supply of the building to a third party if the purchaser is a Taxable Person.
Detailed Discussion
Legislative background
In this clarification, Federal Decree-Law No. 8 of 2017 on Value Added Tax is referred to as “DecreeLaw” and Cabinet Decision No. 52 of 2017 on the Executive Regulations of the Federal Decree-Law No. 8 of 2017 on Value Added Tax is referred to as “Executive Regulations”
According to Article 2, read with Article 3, of the Decree-Law, 5% VAT shall be imposed on every taxable supply made in the UAE by a Taxable Person unless the supply qualifies for zero-rating or exemption under the provisions of Title Six of the Decree-Law. The term ‘Taxable Person’ is defined in Article 1 of the Decree-Law as any person who is or is required to be, registered for VAT in the UAE.
Article 45(9) of the Decree-Law allows the first supply of a residential building within three years of completion to be zero-rated irrespective of whether the building is sold or leased, and whether in part or as a whole.
Article 46(2) of the Decree-Law exempts the supply of residential buildings through sale or lease unless the supply qualifies for zero-rating under Article 45(9) and 45(11) of the Decree-Law. Article 43(1) of the Executive Regulations state that the supply of residential buildings is exempt -unless it is zero-rated- where the lease is more than six months or the tenant of the property is a holder of an ID card issued by Federal Authority for Identity and Citizenship.
Article 37(1) of the Executive Regulations defines the term ‘residential building’ to include any building or part of a building that the person occupies, or that it can be foreseen that a person will occupy, as their principal place of residence. Article 37(2) of the Executive Regulations explicitly excludes the following types of buildings -among others- from the definition of ‘residential building’:
• Sub-clause (b) - any building that is used as a hotel, motel, bed and breakfast establishment or hospital of the like; and
• Subclause (c) – a hotel apartment for which services in addition to the supply of accommodation are provided.
Since the sale of a building is an indivisible supply of a good, the general date of supply rule, as set out in Article 25 of the Decree-Law will apply; that is, the date of supply is the earlier of the date:
• Ownership of the building is transferred to the purchaser (as evidenced by the registration at the relevant government entity);
• On which the purchaser took possession of the building.
• Payment was received in respect of the supply of the building; or
• A Tax Invoice was issued in respect of the supply of the building.
In the case of a lease with either periodic payments or consecutive invoices, the special date of supply rules set out in Article 26 of the Decree-Law will apply; that is, the date of supply would be the earlier of the date:
• Any Tax Invoice is issued in respect of the lease of the building;
• Any payment is due as shown on the Tax Invoice;
• Payment is received in respect of the lease of the building; or
• 12 months lapsed from the date the right to use the building was provided to the lessee.
Article 19 of the Executive Regulations states that, where VAT is due because a payment is made or a tax invoice is issued, the VAT is only due to the extent of that payment or amount stated in the tax invoice. As such, VAT can be accounted for on the amounts as they are billed or paid.
Sale of a building:
In the context of this clarification, the supply of an apartment or any other unit within a building is treated as a supply of a ‘building’.
The sale of a building is a single indivisible supply on the date of supply as determined under Article 25 of the Decree-Law. If the agreement between the seller and purchaser provides for multiple instalments to be paid, the VAT due may be accounted for in accordance with Article 19 of the Executive Regulations: that is, to the extent of the actual payment or amount reflected in the relevant tax invoice.
On the basis that the VAT treatment of the sale of a building crystalizes on the date of supply,
• any change in use before the date of supply would be disregarded for purposes of determining the VAT treatment of the sale as only the permitted use on the date of supply would be considered;
• any subsequent change in the permitted use of the building shall not impact the VAT treatment of the preceding sale of the building.
Purchaser – Acquisition of a residential building and the subsequent supply thereof
If the seller sold a residential building to a purchaser who subsequently leases or sells the building to a third party, two separate supplies occur; that is:
• First supply - The seller supplies the residential building to the buyer on the date of supply as determined under the general date of supply rules. If it is the first supply of the building within three years of completion, the supply may be zero-rated, otherwise, the supply might be exempt from VAT under Article 46(2) of the Decree-Law;
• Second Supply - The purchaser leases or sells the building as a principal place of residence to a third party. This supply is exempt from VAT under Article 46(2) of the Decree-Law; or
• The purchaser might also 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 5% VAT if the purchaser (owner of the building) is a Taxable Person, i.e. registered for VAT or required to be registered for VAT
Purchaser -Acquisition of a non-residential building and the subsequent supply thereof
Non-residential building refers to any building not falling within the definition of a ‘residential building’, for example, hotel/serviced apartments
If the seller sold a non-residential building to a purchaser who subsequently leases or sells the building to a third party, two separate supplies occur; that is:
• 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 is a Taxable Person;
• Second supply - 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, i.e. as a ‘residential building’. This supply is exempt from VAT under Article 46(2) of the Decree-Law; or
• The purchaser leases or sells the building as a serviced/hotel apartment to a third party. This supply is subject to 5% VAT if the purchaser (owner of the building) is a Taxable Person.
Conclusion:
The VAT treatment of the sale of a building is independent from the subsequent supply thereof by the purchaser, and will, therefore, remain the same, regardless of whether the purchaser amends the permitted use to either lease or sell the building to a third party as a residential building or hotel/serviced apartment.
This Public Clarification issued by the FTA is meant to clarify certain aspects related to the implementation of the Federal Law No 7 of 2017 on Tax Procedures, Federal Decree-Law No 8 of 2017 on Value Added Tax and their Executive Regulations.
This Public Clarification states the position of the FTA and neither amends nor seeks to amend any provision of the aforementioned legislation. Therefore, it is effective as of the date of implementation of the relevant legislation, unless stated otherwise.