Change in the Permitted Use of a Building

The Federal Tax Authority (FTA) had seen that many taxable persons are uncertain about the VAT treatment on the subsequent supply of a building after changing its permitted use. This Clarification seeks to explain the VAT treatments on the supplies of buildings (whether for lease or sale) after they have been transferred from a residential property to a serviced/hotel apartment.

In this article, Federal Decree-Law No. 8 of 2017 on Value Added Tax is referred to as the “Decree-Law” and Cabinet Decision No. 52 of 2017 on Value Added Tax is referred to as the “Executive Regulations”.

The “Decree Law” and the “Executive Regulations” explain that the first supply of a residential building within three years is treated as zero-rated, and subsequent supplies are treated as VAT exempted. They also explain that the definition of ‘Residential Building’ is any building or part of a building that the person occupies, or is made to be occupied by persons as their principal place of residence. The following are excluded as being residential buildings:

• Buildings that are used as hotels, motels, hospitals or similar uses; and
• Buildings that are operating as hotel apartments in which extra services are being provided in addition to the accommodation supply.

The “Decree Law” and the “Executive Regulations” define the date of supply of a building as being the earliest of the following:

• Transfer of ownership of the building from the seller to the buyer;
• Possession of the building is taken by the buyer;
• Payment was received in respect of the supply of the building; or
• A tax invoice was issued in respect of the supply of the building.

In case of a lease, then the date of supply is the earliest of the following:

• A tax invoice is issued in respect of the lease;
• Payment is due as shown on the tax invoice;
• Payment is received in respect of the lease; or
• Passing of 12 months from the grant of the right to use the building.

The Executive Regulation explains that where VAT is due because an invoice is issued or payment has been made, then VAT amount is only 5% of the amount mentioned on the invoice or amount received by the owner of the building.

Sale of a building

The “Decree Law” and the “Executive Regulations” state that the decision on the VAT treatment is made only on the date of supply, because only the permitted use of the building on the time of supply is the one that is to be taken into consideration when deciding the VAT treatment. Therefore:

• Any change made on the building’s permitted use prior to the date of supply is to be disregarded because only the use on the date of supply is to be take into consideration;

• Any change in the permitted use of the building made after the date of supply shall not affect VAT treatment on the preceding supply of the building that has already taken place.

Purchaser – Acquisition of a residential building and the subsequent supply thereof

In the case where the owner of the building sells the residential building to the buyer, and then the buyer sells or leases the same building to a third party, two different supplies occur, as follows:

1- The seller (first owner) supplies the buyer with the residential building on the date of supply. This supply would be treated as zero-rated if this supply was the first within three years of completions, otherwise exempted.

2- The buyer (the new owner and seller) supplies (purchases or leases) the residential building to a third party. This supply is VAT exempted.

What if the new owner amends the permitted use of the building immediately after acquiring it and before making a subsequent supply?

In that case, the subsequent supply will have a VAT treatment that falls under different category of the first supply, as the first supply’s permitted use is “residential building” and then the permitted use has been changed to being non-residential building, which makes the subsequent supply supplied at a standard rate of 5%.

Purchaser – Acquisition of a non-residential building and the subsequent supply thereof

Non-residential building is any building that’s permitted use is not residential property, for example, hotels, services apartments, hospitals. In the case where the owner of the nonresidential building sells the building to the buyer, and then the buyer sells or leases the building to a third party, two different supplies occur, as follows:

1- The seller (first owner) supplies the buyer with the non-residential building on the date of supply. This supply shall be subjected at a standard rate of 5%.

2- The buyer (the new owner and seller) supplies (purchases or leases) the third party with the non-residential building. This supply shall also be subjected at a standard rate of 5%.

What if the new owner amends the permitted use of the building immediately after acquiring it and before making a subsequent supply?

In that case, the subsequent supply will have a VAT treatment that falls under different category of the first supply, as the first supply’s permitted use is not a “residential building” and then the permitted use has been changed to being a “residential building”, which makes the subsequent treated as an exempt supply.

It is always important for taxable persons who are related in businesses that are related to what’s mentioned above to understand that the VAT treatment of the sale of the building is totally independent from the subsequent supply, which is made by the purchaser. This means, that also the supply that is made by the purchaser (the new buyer) is totally independent
from the supply that the new purchaser will make, disregarding any amendments made in between the supplies. In other words, the VAT treatment on the supply of the building will depend on its permitted use on the date of supply only, and will not depend on the precedent or subsequent supplies of the same building.

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