Non-resident Property Owners and UAE VAT

The dawn of the new millennium saw UAE, and the emirate of Dubai in particular, become a real-estate investment hub for many Asian and Global investors. The rapid development and strategic location of the UAE, coupled with its rising popularity made it a particularly attractive prospect for real-estate investment.

Ever since the implementation of VAT, there has been some confusion among the property managers and real-estate sector regarding the applicability of VAT to the owners of such properties. The prime focus of this article is to shed light on salient features of VAT and its implications for non-resident landlords.

In our experience, there is an incorrect assumption among the real estate sector and property management companies that the usual threshold of AED 375,000 of taxable supplies shall also apply in a blanket manner to all non-residents owning real estate property and making a taxable supply.

Who is a non-resident?

Under the Federal Decree Law No. 8 of 2017 on Value Added Tax (hereinafter referred to as “the VAT Law”) read with Cabinet Decision No. 52 of 2017 on the Executive Regulations of the Federal Decree Law No. 8 of 2017 on Value Added Tax (hereinafter referred to as “the Executive Regulations”), Article 2 contains the following relevant definitions:

Non-Resident: Any person who does not own a Place of Establishment or Fixed Establishment in the State and usually does not reside in the State.

Place of Residence: The place where a Person has a Place of Establishment or Fixed Establishment, in accordance with the provisions of this Decree-Law.

Place of Establishment: The place where a Business is legally established in a country pursuant to the decision of its establishment, or in which significant management decisions are taken and

central management functions are conducted.

Fixed Establishment: Any fixed place of business, other than the Place of Establishment, in which the Person conducts his business regularly or permanently and where sufficient human and technology resources exist to enable the Person to supply or acquire Goods or Services, including the Person’s branches.

The exception when the standard threshold limit of AED 375,000 for taxable supplies would be applicable is if the business has a place of establishment or fixed establishment with sufficient human and technical resource located within the UAE in order for the landlord to make the supply of the real estate.

It is our opinion that employing the services of third-party professionals to manage the property would not qualify the individual property owner as having a “Fixed Establishment” as mentioned in the above definition. Thus, an individual who owns the properties in his individual name would not qualify as a person who would have a Place of Establishment or Fixed Establishment as contemplated under Article 2 of the Act. Further, a foreign company with no place of establishment or fixed establishment in the UAE would also be a non-resident in UAE.

It is pertinent to note that the VAT Law does not quantify how many days would suffice for the term “usually reside”, or whether mere possession of a residence visa or Emirates ID would qualify the person to be considered as a resident. The usual international standard of 182 days in a financial year (January to December) may be a relevant point to consider in determining if a person would be considered to be “usually residing” in the State.

As in all tax regimes, the onus of proving any claim remains squarely on the taxpayer.

Mandatory registration requirement

Further sub-article (2) to Article 13 of the VAT Law defines the conditions of mandatory registration as follows:

“Every Person, who does not have a Place of Residence in the State or an Implementing State and is not already registered for Tax, shall register for Tax if he makes supplies of Goods or

Services, and where no other Person is obligated to pay the Due Tax on these supplies in the State.”

Taxable Supply

As the obligation to pay due tax can only arise in the case of taxable supplies being made, we have provided a summary of what would constitute a taxable supply with respect to real estate:

Case	If you supply….	….then the VAT liability is….
1	A commercial property	5%
2	A new residential property	0%
3	An existing residential property	Exempt
4	Bare land	Exempt
5	Covered land	5%
6	A new charitable building	0%
7	An existing charitable building	5%
8	A property located within a Designated Zone	Out of scope

Thus, any supply other than case 3, 4, and 8 mentioned above shall be a taxable supply within the meaning of supply.

Further, there is a caveat for case 3, that states that leases of a residential property shall only be exempt if either,

The duration of the lease exceeds 6 months; or

The tenant of the property holds an Emirates ID

Place of Supply of Real Estate in UAE shall always be within the UAE irrespective of the owner’s residential s tatus.

Under the VAT Law, a supply of real estate is considered to be a supply of goods. Further, the place of supply rules clearly states that the place of supply with respect to any “real estate” will be where the real estate is located. Thus, in the case of Real Estate located in the UAE, the place of supply shall be UAE.

Reverse-charge mechanism is not applicable

Given that supply of real-estate is a supply of goods and is already located in the UAE it obviously cannot be imported. Therefore, the reverse charge mechanism mentioned in the VAT Law shall not be applicable to the supply of real estate located in the UAE. This means that “no other Person is obligated to pay the Due Tax on these supplies in the State” as contemplated under sub-article (2) to Article 3 of the VAT Law.

Thus, keeping in mind the above points, it is clear that the VAT registration threshold for non- residents who make taxable supplies in the UAE is Nil. Where such a non-resident landlord makes any taxable supplies related to any real estate located in the UAE, they will be required to register, charge and comply with the regulations of the VAT Law as applicable.

The artcile has been authored by Shrey Joshi, Founder and CEO, Ascent Auditing of Accounts, shrey@ascentauditing.com

 

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