Everything You Must Know About VAT on Mixed-Use Developments in UAE
Like every other industry in the UAE, real estate businesses must also consider the VAT implications on business transactions. Real estate players should understand that special rules of VAT apply to mixed-use developments, for which they can seek the advice of VAT consultants in Dubai. As per the regulations of VAT in the UAE, a building will be considered a mixed-use development if different portions of it are being used for different purposes.
The VAT liability on the supply of mixed-use developments varies from that of residential buildings and commercial buildings. Businesses focusing on mixed-use development should clearly understand this difference to accurately file VAT returns in the UAE. It is advisable to consult with tax agents in Dubai to properly assess the VAT liability on Mixed-Use Developments. In this article, you can have a detailed explanation of the VAT on the supply of Mixed-Use Developments:
What are Mixed-Use Developments?
The Federal Tax Authority (FTA) has issued a guide on Real Estate (VATGRE1) that describes the VAT implications on mixed-use development. The VATGRE1 defines a mixed-use development as a building or plot of land with clear and distinct areas dedicated for different uses which would have a different VAT treatment when supplied. For example, ABC Towers has retail units on the ground floor level, office or commercial space on the middle floors of the building and residential units on the top floor. In this case, ABC Towers has clear and distinct areas used for different purposes and will be considered a mixed-use development.
VAT Liability on Mixed-Use Developments
When a distinct part of a mixed-use development is supplied, the VAT liability on the supply depends on the use of the portion of the building which is being supplied. For example, if it is a commercial unit the standard VAT rate of 5% will apply. If the portion supplied is used as a residential unit, you need to check whether it is a first supply or a subsequent supply. The VAT on the residential part of the building will be treated as zero-rated if it is the first supply of the property within three years from its date of completion.
Subsequent supplies of the residential part of the building will be considered exempt from VAT. If the mixed-use development is sold in its entirety, you will be required to apportion the consideration received between the different parts of the building. It means the value of the consideration related to the residential part of the building will be treated as exempt from VAT (or zero-rated, when the supply is the first supply) and the value of the consideration relating to the commercial part of the building will be liable for VAT at the standard rate of 5%.
VAT Recovery on Development Costs
As per the UAE VAT regulations, the input tax incurred on the development of a new commercial property can be recovered in full provided that the supplies of the building are taxable. It means that the developers can recover the VAT over the course of the building’s development. If a taxable person incurs the costs of the development of a residential building, all the VAT incurred on the cost of development can be fully recovered provided the costs relate to the zero-rated first supply.
Any subsequent supplies of the building by that taxable person will be ignored for input tax recovery. In view of these rules, any VAT incurred on the development of a mixed-use development can be fully recovered. Tax agents in Dubai can assist the developers in this regard.
VAT Recovery on Repair & Maintenance Costs
You are allowed to fully recover the input tax incurred on the repair and maintenance costs of a property exclusively used for commercial use. However, the input tax incurred on the repair and maintenance costs of a property exclusively used for residential purposes is not recoverable. However, the input tax incurred on a property used for both commercial and residential use must be directly attributed to the VAT on costs incurred as far as reasonably possible.
For example, ABC Properties is a mixed-use property that has both retail shops and residential apartments. In this case, any cost incurred that directly relates to the shops can be fully recovered. However, any cost that directly relates to the residential properties can’t be recovered. VAT consultants in Dubai can help the developers accurately assess the VAT incurred on repair & maintenance costs.
Consult with the Best VAT Consultants in Dubai, UAE
Mixed-use properties have special VAT treatments that developers must be aware of. Businesses can accurately assess the VAT implications with the help of the best VAT consultants in Dubai, such as Jitendra Chartered Accountants (JCA). We are a regulated tax agency with one of the best FTA-approved tax agents in Dubai, UAE. We can help you to meet requirements such as VAT accounting, VAT return filing, VAT refunds, VAT reconsideration etc.