VAT Treatment of Furnished Service Apartments and Hotel Stays in UAE

In this article, we will try to analyse the VAT implications for leasingServiced Apartments and Hotel Apartments in The United Arab Emirates (UAE).

We will start with briefly quoting the relevant articles from the VAT law.

As per Article 5 of the VAT Law, a transfer of ownership of Goods or entering into a contract which provides for transfer of Goods at a later date shall be considered as a supply of Goods, where “Goods” means physical property including real estate.

Further Clause(2) of Article 46 states that supply of residential buildings through sale or lease, other than the supply where VAT is applicable at zero rate will be exempt from Tax, where “Residential Buildings ” is a building or part thereof that is intended and designed for occupation by individuals, and mainly includes buildings which can be occupied by any person as a main place of residence. It does not include:

• Any place that is not a building fixed to the ground and can be moved without being damaged.
• Any building that is used as a hotel, motel, bed and breakfast establishment or hospital or the like.
• A serviced apartment where services in addition to the supply of accommodation are provided.
• Any building constructed or converted without lawful authority

It is important to note that Article 37 of VAT Executive Regulations exclude buildings used as hotels and serviced apartments from being ‘residential buildings’.

This exemption on supply of residential accommodation will apply where:

• The duration of lease exceeds 6 months; or
• The tenant of the property holds an Emirates ID

The question is whether leasing a serviced apartment or hotel apartment, which is a  furnished accommodation, for both short term as well as long term ie. lease ranging from 1 month to 12 months, would attract VAT or not?

The answer is “Yes”.  The service of leasing hotel apartments and serviced apartments would attract VAT at the standard rate of 5% , even if the lease extends beyond 6 months or where the tenant holds a valid Emirates ID. This is because such supplies would not constitute supply of “Residential Buildings”.  Article 37 of VAT Regulations exclude buildings used as hotels and serviced apartments from being ‘residential buildings’. Reason being leasing of hotel and serviced accommodation comes with ancillary services such as cleaning services, maintenance services, provision of linen etc , which is not considered as falling within the definition of ‘residential buildings’ for the purpose of VAT exemption as per the VAT Regulations.

Residential property leased out on a short-term basis to non-residents would also attract VAT @ 5 per cent, while residential property as such is exempt from VAT. If a lease is less than six months and the person living there doesn’t have an Emirates ID, it would be deemed commercial from a VAT perspective and standard VAT rate of 5% would apply.

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