VAT Implications on Residential Buildings
Q: Will VAT be Charged on The Renting of Building?
A: The rent of residential building will be exempt from VAT.
Q: How VAT Will Effect on Multi-Purpose Building (Residential-Commercial Building)?
A: Supply of residential part of multi-purpose building shall be charged either zero-rated or exempt depending on whether it is first supply or subsequent supply.
Q: Which Buildings Are Residential Buildings (Rbs)?
A: It mainly includes buildings that can be occupied by any person as the main place of residence. Following is the list of such buildings;
- A full building available for human residence e.g., a full house, a quarter
- A part building available for human residence e.g., a flat in 5th floor is for residential purpose whereas rest of part is for commercial purpose
- Residential accommodation for students where they can reside e.g., hostels
- Residential accommodation for armed forces & police personnel where they can reside
- Orphanage houses
- Nursing homes
- Rest homes
- Buildings whose small portion is used as an office or workspace by occupants, only if such buildings have garages, gardens or any similar features.
On the contrary; movable/temporary buildings, hotels, motels, B&Bs, hospitals, serviced apartments-where accommodation service is not only offered service, offices, warehouses, shops, unlawful buildings or any kind of building that has commercial substance, are not RBs.
Q: Are Owners of Rbs Required to be Registered in VAT?
A: If owners of RBs have no other business activity then they are not required to be registered in VAT.
Example: a citizen of UAE, who is the owner of his residential building, is not carrying any business then he is not required to be registered in VAT in UAE.
On the contrary; an owner of RBs have also other business activity, like running a retail business, is required to be registered in VAT.
Q: Will the Supply of Rbs Be Chargeable to VAT?
A: No, the supply of RBs will remain exempt from VAT, only if either of the following conditions met;
- Tenant must be a holder of an ID card issued by Federal, or
- Period of tenancy exceeds from 6 months
Q: How Shall “Period of Tenancy” be Determined?
A: It shall be determined from the contract of tenancy. Further, an extension of a period of tenancy or extension in renewing tenancy agreement shall not be covered in “period of tenancy”.
Q: Will Early Termination of Lease Effect “Period of Tenancy”?
A: No, if any party exercise his right of early termination then it shall not effect on “period of the tenancy.
Q: Will Supply of Converted Rbs be Chargeable to VAT?
A: Yes, a supply of converted RBs are chargeable to VAT @ 0%, only if following conditions met;
- It is the first supply of converted building,
- is being supplied within first 3 years of its completion of the conversion, and
- was not used as a residential building, wholly or partly, within 5 years prior to the conversion work commencing
Example: Mr. A, an original owner, constructed a building for renting it to different professionals for offices. Construction of such building completed on 1st February 2018. He couldn’t receive a positive response from business personnel by the end of 31st December 2018 and most of the rooms in building remained vacant. On 1st January 2019, Mr. A decided to convert this commercial building to residential building. Documentation of such conversion completed on 30th April 2019. By 30th April 2019, neither part of building utilized for residential purposes. Now, on 31st May 2019, he got an offer from his friend Mr. B to sell A’s building for AED 500,000 where Mr. A agreed thereto.
Thus, VAT shall be charged @ 0% on AED 500,000 as all above-stated conditions are met.
Q: Will VAT Be Chargeable on Subsequent Supplies?
A: Subsequent supplies of RBs is exempt from VAT irrespective of holding period, even if supply is within 3 years of completion of the conversion, in converted RB case.
Example: Mr. C purchased Residential Building from Mr. B on 30th June 2020 and further sold to Mr. D after 6 months i.e. 31st December 2020 for AED 700,000. It shall be exempt from VAT, irrespective of holding period.
Read more about VAT For Real Estate in UAE