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There are so many considerations for VAT collection when a building is either distinctively residential or commercial.
But what happens when one building has both types of units – residential and commercial?
Let’s say you run or manage an apartment building with retail shops on the ground floor.
Do you know which leases you should charge VAT on and which ones are exempt? And when you can reclaim VAT and when you can’t?
Keeping reading to get clear on the differences in VAT collection between residential, commercial, and mixed-use buildings.
But first – what is a residential and a commercial building, according to UAE law?
To put it simply, residential buildings are those that are constructed exclusively as a place of primary accommodation.
By that definition, homes, villas, apartments, and hostels are all residential buildings. Pretty simple, right?
But wait there’s one more thing to consider, according to the FTA:
To be legally considered a residential building, the structure must be fixed to the ground. This rules out “accommodations” such as caravans as residential buildings.
Now, what about hotels, motels, serviced apartments, or other short-term accommodation establishments?
Even though these buildings are made for “accommodation,” they are not legally considered buildings. According to FTA law, they are categorized as commercial buildings.
Essentially, any building that’s not a primary place of accommodation is legally a commercial building.
Yes, all such buildings from warehouses, to hotels, to retail shops are commercial buildings.
The only real estate not considered commercial are bare lands and buildings belonging to charitable organizations. Those are the exceptions.
VAT for commercial, residential, and mixed-use buildings in the UAE
Now that you know the differences between residential and commercial buildings, let’s talk about output VAT – that is, the VAT you charge your clients.
a. VAT for commercial buildings
As a norm, the sale or lease of commercial buildings are taxable at the standard VAT rate of 5%.
b. VAT for residential buildings
VAT collection for residential buildings is a bit more complicated.
This is because residential buildings can be divided into two categories: new residential buildings and commercial buildings recently converted into residential units.
And, FTA has different regulations for each type of residential building.
The VAT on the first lease or sale of a new or converted residential building is zero-rated, if done within the first three years after construction or conversion.
According to tax law, this transaction is called first supply.
So, what exactly is zero-rated in this situation?
This means in the first sale of a new apartment, or the first lease of a new villa, your invoice should have a line item for VAT – but the VAT percentage should be zero.
Any other lease or sale is tax-exempt which means there is no tax.
Now you may be wondering – what is the difference between zero-rated and VAT exempt?
Essentially, in either case you wouldn’t charge your client VAT.
There are two reasons why.
First, let’s say you are renting out a new apartment building and incur some costs.
If your leases are zero-rated, you will be able to claim back the VAT you pay on those expenses. That’s right – you will get a tax refund on those expenses. Exciting, right?
But if your apartments are older and the leases are “exempt,” you won’t be able to claim back the VAT.
The second reason concerns the VAT registration threshold.
If your revenue from the zero-rated leases or sales exceeds the VAT registration threshold, you will have to register with the FTA.
I know you wouldn’t be collecting taxes, but you still need to register.
c. VAT for mixed-use buildings
Now that you have a fair understanding of VAT for commercial and residential buildings, let’s clarify VAT collection for mixed-use buildings, that is, buildings that have both commercial and residential units.
It’s actually pretty straight forward:
Simply apply VAT rules for commercial buildings to the commercial units and residential regulations to the residential units, depending on the factors we discussed above.
VAT for commercial buildings is pretty easy to understand.
However, VAT for residential buildings and mixed-use buildings need to be calculated keeping in mind a lot of exceptions, as outlined by the FTA.
If you need help understanding where you stand with VAT collection for your property, please get in touch with us.
And, if you found this article helpful, do share it with your colleagues or friends.