UAE FTA publishes VAT Public Clarification and updated guidance on the Real Estate sector


VAT Public Clarification VATP018 clarifies the VAT treatment of the sale of a building and the subsequent supply thereof by the purchaser and is relevant to any business involved in buying and selling property.

The updated Real Estate VAT guide includes a number of important revisions which are relevant for property developers, construction firms, and any other employers that provide residential accommodation to their employees.

VATP018 on change in the permitted use of a building

VAT Public Clarification VATP018 addresses the VAT implications of situations where a building is sold to be used in a certain way (i.e. residential or non residential), and subsequent to the date of supply, the purchaser changes the permitted use of the building. 

VATP018 clarifies that a change in permitted use will not change the VAT treatment of the preceding sale, but will change the VAT treatment of any subsequent sale of the building by the purchaser per the new permitted use.

As an example, such a scenario would take place where a building is sold as a serviced/hotel apartment (a non-residential building for VAT purposes), and subsequently the purchaser changes the permitted use to residential use only and sells the building on to a third party.

In this scenario, the purchase of the building for use as a serviced hotel apartment would have been subject to VAT at the standard rate of 5% (assuming it was not the first sale of the building within three years of completion, in which case the sale would have been zero rated).

The change in permitted use after the date of supply to a residential building would mean that the building will thereafter be subject to the VAT treatment of a residential building. If the purchaser then sells the now-residential building on to a third party, it would be an exempt supply. The VAT treatment of the preceding sale, however, will not be impacted.

Likewise in the opposite scenario, a building sold as a residential building will be exempt from VAT (assuming it was not the first sale of the building within three years of completion, in which case the sale would have been zero rated). If, after the date of supply, the purchaser changes the permitted use to a non-residential use, i.e. a serviced hotel apartment, and then sells the building on to a third party, the sale will be subject to VAT at the standard rate of 5% as a non-residential building.


Updates to the Real Estate VAT guide

The key updates in the Real Estate VAT guide relate to the following:

Supply of employee accommodation

  • Usually, where an employer does not charge its employees any form of consideration in exchange for residential accommodation, it is not considered to be making a supply for VAT purposes, and input tax incurred in providing the residential accommodation is recoverable by the business as a general overhead cost of the business. The updated guide specifies that input tax incurred by an employer in order to provide accommodation to an employee will not be recoverable if providing accommodation to the employee is not necessary for the employee to perform their role, citing the example of accommodation in hotel apartments.

Bare land

  • Where fencing or moveable structures are erected on bare land at the commencement of construction, doing so will not in and of itself cause the bare land to be considered ‘covered’ for the purposes of VAT, as long as it fulfills the other conditions for bare land (i.e. must not be covered by completed or partially completed buildings beyond foundation level, or civil engineering works).
  • Where bare land is leased to a tenant who then begins development which leads to the land to be considered covered, if the date of supply has already been triggered for the bare land prior to the point when the land became covered, e.g. by a full payment prior to the lease commencing, no adjustment to the VAT treatment is necessary. This is a departure from the earlier guidance that made it necessary to apportion the consideration already received which subsequently became taxable following the change in the nature of the supply.
  • In the above scenario, where the tenant develops the bare land to an extent that it is considered covered, and the lease is on a periodic payment basis, the tenant must notify the supplier that the land is covered, and the VAT treatment of the remainder of the lease should be adjusted so that VAT is charged at the standard rate, as the supply will no longer be considered to be bare land.
  • In the above scenario, Musataha agreements registered with the appropriate Land Department or Municipality will be treated the same as a contract of sale or one-off lease with no adjustment to the VAT treatment required. However, if the Musataha agreement is not properly registered, the lease will be treated the same as any other lease agreement. If the parties were unable to register the Musataha agreement due to circumstances beyond their control, the parties may seek a clarification from the FTA on how the lease agreement should be treated.

Owners’ Associations and Management Entities

  • In addition to Owner’s Associations (OAs), the guide now includes reference to Management Entities (MEs). While OAs are usually composed of owners of the individual units in a building, MEs may include the developer, management company, or hotel project management company as applicable.
  • The new version of the guide states that OAs and MEs are considered persons for VAT purposes and are required to register if their supplies exceed the VAT registration threshold. Previously, the guide only stated that OAs are required to register for VAT.
  • All other provisions related to OAs appear to also apply to MEs.

Other updates

There are several other updates, including the VAT recovery on repair and maintenance costs for mixed use buildings (how to apportion the VAT), the payment of VAT on the sale of commercial real estate (buyer may pay the VAT via a bank nominated by the FTA) and VAT refunds for new residences (all applications to be submitted on the FTA portal).


Next steps

We recommend that businesses in the Real Estate sector or engaged in related transactions familiarize themselves with the new Public Clarification and updated guidance published by the FTA.

In particular:

  • Businesses that provide residential accommodation to employees should review whether input tax is correctly recovered.
  • Landlords and tenants of development land leases should review whether VAT has been correctly charged, especially in the case of upfront lease payments.     
  • Developers should consider whether their management entities are registerable and the VAT treatment of the sale of residential property.

Where existing agreements are in conflict with the updated guidance, there should be communication between suppliers and customers to agree on a way forward and potentially amend existing contracts in order to bring them in line with the guidance.

Businesses may also benefit from seeking clarification from the FTA in order to determine how the updated guidance and Public Clarification applies to their

Note that while the Public Clarification and guide set out the FTA’s position on the matters discussed, they do not amend the existing legislation, which takes precedence over any supplemental guidance.

Did you find this useful?