UAE VAT Public Clarification (VATP022) for Dubai Owners' Associations and the Management Entities

The Public Clarification about VAT has been released by Federal Tax Authority for informing Dubai’s Owners’ Association as well as the Management Entities about the obligations in United Arab Emirates Value-added tax legislation due to significant changes in the legislation of Dubai real estate. On the 4th of September, 2019, the Law No. 6, related to ownership of the Jointly Owned Real Property in United Arab Emirate, was being published and the effective date was 3rd of November, 2019. It is stated in Law No. 6, Article 49, that all the rights as well as obligations of the Owners Association that arose prior to effective date of Law are required for transfer to Management Entities. In the Emirate of Dubai, the VATP022 is only applicable to the Owners Association and the Management Entities. It has been confirmed by the Value-added tax P022 that the Federal tax Authority does not consider the Owners Associations anymore as legal persons having an entitlement for registering for the value-added tax since they cannot produce taxable supplies due to enacting Law No. 61.

There was an obligation for the Owners Associations for deregistering for the value-added tax, when they had been registered for the value-added tax at that particular time, during 20 business days as per the Law No. 6 taking effect, from December 4th, 2019. The Law No. 6 has defined the Management Entities as the developers, management companies or the management companies associated with hotel project, which had the responsibility of managing the common facilities as well as areas for the owners of property. There had been a shift from the Owners Association to the Management Entities for the rights as well as obligations under the Law No. 6. This shift now gives the responsibility of charging as well as accounting for the value-added tax that is due against the fees of management to the properties owners onto the Management Entities as the principles in a supply. In case of Management Entities being registered for the value-added tax, the Federal Tax Authority has an expectation that the value-added tax that is being charged previously by the Owners Association to the owners of the property on any fees associated with management, to be accounted for and to be paid by the Management Entities, and the invoices of tax for such supplies that are taxable, to be issued as well as delivered to the supply recipients from the 3rd of November, 2019, which has been the effective date of the Law No. 6. The Management Entities are able to recover any value-added tax that is incurred in relation to producing the taxable supplies on the receipt of the valid invoices of tax under their own name, and subjected to normal rules for the recovery of input value-added tax1.

The Federal Tax Authority has been presented clearly that a range of penalties associated with the administrative and the late payments can be applied in case of violations through the Owners Association and the Management Entities as a result or consequence for not taking action of time followed with the Law No. 6 release. These may include the following:

• Failure to deregisters by the 4th of December, 2019 by the Owners Association that are impacted
• Failure to issue the valid tax invoices as well as tax credit notes by the Management Entities, wherever relevant, associated with making a supply that is taxable
• Submission of the incorrect value-added tax returns by Management Entities
• Under declaration of the value-added tax by the Management Entities

It has been assumed that clarification has to be treated in terms of having a retrospective effect to Law No. 6 effective date, in case of absence of any contrary statement. The Owners Association and the Management Entities operating in the Dubai Emirate, under the Law No. 6, have to take immediate actions following the VATP022 publication in respect of the historic United Arab Emirate Value-added tax obligations[1].

The Management Entities are considered as making supplies to owners of the Jointly Owned Real Property therefore they have to fulfill the value-added tax obligations including the issuance of valid tax invoices and also value-added tax reporting[2].

Penalties

In case of non-compliance with requirement of deregistration by the Owner’s Association is AED 10,000. The penalty in case of failure to issue the valid tax invoice or the credit notes per documenter is AED 5000. If the Management Entity does not submit the correct value-added tax return, there will be two penalties3:

• A fixed penalty of AED 3000 in case of first time and if there is repetition then it will be AED 5000
• A percentage-based penalty in case the Management Entity took a tax benefit by submitting incorrect return

In case there has been incorrect tax return which had resulted in the unpaid tax due, Management Entity will have the obligation of paying late payment penalty which will consist of:

• 2& of unpaid tax, immediately after the payment of the payable tax is late
• 4% will be due on seventh day followed by the payment deadline, on tax amount which is not paid
• 1% daily penalty taken on amount which is not paid one month followed by the date of deadline of payment with the upper ceiling of 300%[3].

[1] Rhys Penning, Julie Lere-Pland, and Keith Donegan, “Tax Flash - New Public Clarification from the Federal Tax Authority,” November 18, 2020, https://home.kpmg/ae/en/home/insights/2020/11/tax-flash-new-public-clarification-from-the-federal-tax-authority.html.

[2] GCC Team, “VAT Public Clarification on Dubai Owner's Association and Management Entities,” GCCfintax (GCC Fintax, November 18, 2020), https://www.gccfintax.com/news/vat-public-clarification-on-dubai-owner-s-association-and-management-entities-1737.asp.

[3] “Public Clarification on Dubai Owner's Association and Management Entities,” VAT Consulting UAE EN, November 18, 2020, https://thevatguide.ae/tpost/oydm0791o1-public-clarification-on-dubai-owners-ass.

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