Everything You Must Know About VAT on Mixed-Use Developments in the UAE
Mixed-use projects look simple from the outside. But once owners try to file VAT returns, confusion starts. Many people are unsure which part of the building is taxable, which part is exempt, and which part qualifies for zero-rating. This leads to erroneous filings, delays, and even penalties.
The stress grows when the property has shops, offices, and homes under one roof. Each part has its own VAT rule. If these rules are ignored, businesses may lose resources that could have been saved or recovered.
The UAE has clear rules for mixed-use developments. JCA (Jitendra Chartered Accountants) helps in understanding these rules so that developers and owners can plan better, recover the right amount of VAT, and avoid mistakes. Our VAT agents in the UAE assist with VAT compliance.
What does a Mixed-Use Development mean in the UAE VAT?
A building is treated as mixed-use when its areas are used for different purposes. Each part must be clearly separated. The Federal Tax Authority explains this in the real estate VAT guide.
A common example is a tower that has shops on the ground floor, offices on the middle floors, and apartments on the top floors. Since each part has a different use, each part will have a different VAT treatment when supplied.
This clear division is important. VAT is not applied to the whole building in one single way. Each area is treated according to how it is used.
How VAT Works When Supplying a Part of a Mixed-Use Property
When a developer supplies or sells a specific portion of the building, the VAT rate depends only on the use of that portion.
- Commercial Units
If the part supplied is a shop, office, or any commercial space, the standard 5% VAT applies.
This is the same rule used for regular commercial buildings.
- Residential Units
For residential areas, you must check whether the supply is the first supply or a later supply:
- First supply within three years of completion→ Zero-rated
- Supply after three years→ Exempt
This rule affects how much VAT the buyer pays and how much VAT the seller can recover.
Still confused? Seek assistance from our expert VAT agents in the UAE.
Supplying an Entire Mixed-Use Development
When the whole property is sold as one deal, the price must be divided. You cannot treat the entire amount as taxable or exempt. Instead, the value must be split between the residential part and the commercial part.
- The value linked to commercial spaces is taxed at 5%.
- The value linked to residential spaces is either zero-rated (if it is a first supply within three years of completion) or exempt (if supplied later).
This step is important because the wrong apportionment can lead to inaccurate VAT returns.
A simple example often seen in practice:
A property with shops and homes is sold for one lump sum. The seller must separate the value used for shops and the value used for apartments. Only the shop portion attracts 5% VAT. The residential part does not, unless it qualifies for zero-rating.
VAT Recovery on Development Costs
Developers spend a large amount on construction, planning, approvals, and materials. VAT rules allow recovery of these costs in many cases.
Commercial Areas
VAT paid on developing a new commercial property can be fully recovered. This is because commercial supplies are taxable.
Residential Areas
VAT paid on building a residential property can also be recovered if the costs relate to the zero-rated first supply.
Any residential supply made after the first supply does not give additional recovery rights.
Mixed-Use Case
For mixed-use developments, developers are usually able to recover all VAT on development costs. This is because the project involves both residential first supplies (zero-rated) and commercial supplies (taxable).
This recovery can significantly reduce the overall project cost, which is why proper planning and correct classification matter.
Need more detail? Get it from our professional VAT agents in Dubai.
VAT Recovery on Repair and Maintenance Costs
There are different rules for ongoing costs after the building is completed.
Commercial Use Only
If the repair or maintenance relates only to commercial areas, the input tax can be fully recovered.
Residential Use Only
Costs linked only to residential areas are not recoverable.
Mixed-Use Repairs
When the cost is for a building that has both commercial and residential spaces, the business must divide the cost based on how the expense relates to each part.
An example is a tower with retail units and apartments.
- If the maintenance work is for the shop area, VAT is recoverable.
- If the work relates to apartments, the VAT is not recoverable.
Correct attribution is important.
How can Jitendra Chartered Accountants (JCA) help?
JCA’s professional VAT agents in the UAE help you;
- Understand your VAT liabilities
- Register for VAT
- File your returns correctly and on time
- Manage disputes with authorities
- Ensure compliance with VAT regulations