No VAT on realty transactions in designated zones in UAE

Sale and lease of both commercial and residential properties in designated zones will be outside the scope of VAT, according to the latest clarification issued by the Federal Tax Authority (FTA) at a meeting with a group of tax consultants in the UAE.

"Sale or lease of any real estate property - commercial or residential - will be considered as outside the scope of VAT. Hence, there will be no VAT applicable on sale or lease of commercial or residential real estate properties in designated zones. Furthermore, the payment of five per cent VAT on purchase of commercial property in non-designated zones can be made directly by the buyer to FTA and the commercial property will get legally transferred to the buyer's name once he has made VAT payment to FTA," said Mayank Sawhney, director, MaxGrowth Consulting.

Earlier this month, the FTA announced 20 designated zones across the UAE with seven in Dubai; three each in Abu Dhabi and Ras Al Khaimah; two each in Sharjah, Fujairah and Umm Al Quwain and one in Ajman.

Those designated zones are Jebel Ali Free Zone, Dubai Airport Free Zone, Dubai Aviation City, Dubai Textile City and Dubai Cars and Automotive Zone in Dubai; Abu Dhabi Airport Free Zone, Khalifa Industrial Zone and Free Trade Zone of Khalifa Port in Abu Dhabi; Hamriyah Free Zone and Sharjah Airport International Free Zone in Sharjah; Ajman Free Zone in Ajman; Umm Al Quwain Free Trade Zone in Umm Al Quwain; RAK Free Trade Zone, RAK Maritime City Free Zone and RAK Airport Free Zone in Ras Al Khaimah; and Fujairah Free Zone and Fujairah Oil Industry Zone in Fujairah.

In addition, the FTA clarified that the if owners' associations are operating independently from the developer or property management companies, they are required to register for VAT, Sawhney said, adding that currently most of the owners associations have not yet registered.

Most of the home owners' associations are governed by the Real Estate Regulatory Authority, he said.

Anurag Chaturvedi, senior director, Horwath MAK, said home owners' associations enter into agreement with third parties to provide maintenance services and charge tenants. Therefore, services provided by home owners associations are considered to be taxable supply and are subject to standard rate.

Chaturvedi also noted that if an individual is registered for VAT for income in his personal capacity such as commercial rents, and he cannot use his own Tax Registration Number (TRN) for business purposes. Similarly, business TRN cannot be used for personal purposes.

With regard to the first VAT return filing, Sawhney explained that the extension was not granted to all the companies but small and medium enterprises.

"All small and medium-scale companies have got an extension for first VAT return filing and under the current staggered mechanism, the first return filing period for such SMEs is either three months ending on March 31, 2018, four months ending on April 30, 2018 or five months ending on May 31, 2018, and quarterly thereafter. For large groups, the tax period is still monthly and they have to file first VAT return for the month ending January 31, 2018," Sawhney said.

The FTA also clarified that branches of foreign companies which are not making taxable supplies in the UAE will be eligible to claim input tax credit or refund of the VAT that they pay on expenses they incur in the UAE, subject to the fulfillment of certain conditions and criterion, Sawhney added.

He noted that the payment of tax at the moment can only be made to the FTA either through e-dirham card - which only has a nominal charge of something like Dh3 per transaction - or through corporate debit and credit cards, in which case the banks will be charging a fee of two per cent or more of the transaction value plus VAT on such fee.