VAT on Jointly Owned Properties (JOP) / Owners Associations (OAs)
It was always debatable topic VAT on JOP in the United Arab Emirates (UAE), till the Federal Tax Authority (FTA) issued guidelines on real estate VAT, which has been covered the VAT liability of JOP/OAs in the year 2018. There are plenty of opinions from different parties still in the market on VAT liability relating to services charges. Main reason for that is there is no legal establishments in many cases for JOP/OAs in the industry. But FTA has issued clear guidelines to follow. Let’s go in to details to understand and identify practical issues facing JOP/OAs in terms of tax environment.
What are JOPs/OAs
JOPs/OAs are often established to manage and administer the common areas of a building on behalf of all of the unit owners of a building. They commonly deal with issues such as cleaning, maintenance, security, etc. and are often comprised of members who are the owners of the individual units themselves. JOP/OA is normally responsible for the procurement of services required to maintain the upkeep of the property and collects money from all the owners of individual units within the property in order to pay the expenses of contractors or to fund major refurbishment works. JOPs/OA’s are usually not-for-profit organizations or associations, but they can take many different legal forms. They are not normally incorporated legal entities, but instead they could be,
- A legal partnership between the members.
- An association with legal status, registered under laws concerning joint property ownership.
- An unincorporated group or association with no legal personality/status.
In UAE due to non-availability of legal existence for many JOPs/OAs, there is an entity which help the activities of JOP/OA called Management Entity (ME). ME can be a developer or management company contracted to manage the building. Normally ME is entered in to the contracts with the third parties and take responsibility on behalf of JOP/OA.
According to the Law No. (6) Of 2019, regarding Ownership of Jointly Owned Property in the Emirate of Dubai, the Owners’ Association Management Companies have given more responsibilities to act on behalf of JOPs/OAs.
Is JOP/OA required to be registered for VAT purposes?
JOP/OA will be required to register for VAT where any of the following applies,
- It exercises any form of control, management and administers the common areas, including dealing with issues such as maintenance, security, rule enforcement, general well-being of tenants, financial management and engagement with statutory authorities.
- It has a legal personality distinct from its members e.g. where it is registered under laws concerning joint property ownership and is constituted as a formal partnership, etc.
- It undertakes an economic activity.
- It makes supplies which would be taxable supplies if the entity was registered for VAT.
- Its taxable turnover exceeds the mandatory registration threshold.
VAT liability on JOP/OA services
The VAT liability of supplies made by JOP/OA may vary depending on the nature of the supply made by the JOP/OA.
A) Type of income generated by JOP/OA and VAT impact,
- Service charge – Service charge is the cost of maintaining the property and includes the costs for cleaning, maintenance, security, repair jobs of the common areas in the property. If the JOP/OA has ability to register for VAT, Service charge is a taxable supply and it will be charged at 5% of standard rate of VAT.
- Other Income – JOPs/OAs are generating several types of other income by providing different service activities to its unit owners such as car wash income, access card income, rental income from renting out roof tops, etc. which also can be considered as taxable supply and will be charged at 5% standard rate of VAT.
- Penalty Income – Penalty charges are charged on the delay of service charge payments and it will not be considered as taxable supply and VAT will not be charged.
Practical concern – Can non resident unit owners get VAT invoice on the services charge?
Yes. Service charge is related to the real estate property situated in UAE, need to charge VAT irrespective of the unit owner residency status. According to the Article (31)of the executive regulation to qualify as zero-rated export services, there are conditions to comply. One of them is the services are not supplied directly in connection with real estate situated in the State. The services charges always connected to the buildings situated in the UAE, irrespective of the residency status of the unit owner, VAT will apply.
B) Recoverability of Input VAT on JOP/OA
Hence, JOP/OA will be required to charge 5% VAT on service charges and if JOP/OA registered under VAT, will be allowed to recover any VAT incurred on services it purchases from third parties for the purposes of maintaining the building. All normal input tax recovery rules apply for the JOP/OA in the UAE.
Practical concern – Can JOP/OA claim invoices under the name of ME?
In some cases, tax invoice is raised by the service provider under the name of ME (Developer or JOP/OA manager) as the contracts are under the name of ME. In some scenarios service provider are not willing to change the customer details without proper legal existence of an entity in UAE. Under the normal input tax recovery rules in UAE, it is not possible to claim input tax without proper tax compliant invoice. In this case JOP/OA should ask services provider to re-issue the same invoice at the first time to correct VAT registered name of the JOP/OA with the TRN number and other details. If this is not possible, JOP/OA need to obtain recharge tax invoice from the ME to stay and comply with the tax system.
We, Crevaty can help MEs or JOPs to comply with VAT requirements in UAE as we have team of people who are daily assisting many MEs or JOPs.
For the further information please refer section 08- Real Estate VAT guide issued by FTA, 2020 April.