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Supplies of buildings, whether sales or leases, are one of the most common forms of business transactions in the UAE, owing to their prominence in the real estate sector. Aside from the more common residential type of supplies, other scenarios feature a mixed nature of sale or lease contracts, which can make determining the right VAT treatment more difficult. One of such aspects includes change in the use of the building prior to or subsequent to the date of supply. In today’s blog, we will be discussing VAT impact on change in the permitted use of the building.

What are the VAT treatments on building sales in UAE?

Based on the nature of the use of building’s as on the date of supply, a sale or lease of a building might be standard rated, zero-rated, or exempt. The first supply of the building within three years of its completion of construction shall be zero-rated if it is used for residential purposes. Following that, any sale or lease of such a building will be Exempted from VAT free as long as it is still used as a residential property. If the building is used for commercial purposes, say running a hotel, any supply of the building, be it a sale or a lease, will be subject to taxed at the standard rate of 5%.

Things to consider while determining the VAT treatment on building sale

The nature of the use of the building on the date of sale plays an important role in determining the VAT treatment on the sale of a building. This is because the property is seen as a single indivisible commodity, and its status at the time of supply is what counts. If the building is used for commercial purposes on the sale date, a standard VAT rate will be applied and if it is used as a residential space, the supply will either be exempted  or zero-rated if it is the first sale happening within three years of its completion of construction.

VAT implications upon change of its permitted use that occurs after building sale

The buyer of the building may modify the nature of the structure’s usage once he buys it. According to the VAT regulations, this modification will not affect the VAT treatment of the building’s previous sale. For instance, a commercial building was sold, and the buyer later altered the building’s permitted use to residential. The building was sold at a regular rate of 5%, but the subsequent change in its use will not affect the previous sale transaction.

Identifying a residential building

A residential building is a structure or part of a building that is used as a person’s primary residence. Buildings used as hotels, motels, bed and breakfast places, and resorts (hotel apartments) are specifically excluded from the concept of a residential building under the VAT rule.

Determine the sale date to sell a building

When a sale of a building happens, the sale date is recognized as the earliest date from any of the following:

• The date on which ownership is transferred from one person to another, which is usually the registration date.
• The date on which the buyer took possession of the property
• The date on which the seller receives payment.
• Issue date of the tax invoice for the sale

Determine the sale date for the lease of a building

In the case of a building lease, the date of sale can be identified as the earliest date from among the following.

• The date on which the tax invoice for the lease was issued
• Any lease payment due date as per the invoice
• The lessor received the lease payment on this date.
• The date when the period of lessee’s right to use the building has completed 12 months.

Let us assist you

It is always best to consult with VAT experts to make informed decisions on VAT treatments about business transactions. The Controller has experts who have provided VAT services to enterprises with buildings as invested assets in the UAE. We’ve analyzed a variety of deals involving the delivery of buildings in the UAE. Our VAT experts can assist you in diligently and meticulously evaluating the requirements of VAT regulation as applicable to your specific scenarios to achieve the right tax treatments. Call us now for a free consultation….!!!