VAT Treatment of Residential and Serviced Accommodations

Main Issues:

  • Accommodation Provided to labor shall be classified as Residential or Serviced accommodation
  • Services Provided in addition to the accommodation shall be treated a single composite supply or mix supply

Impact on VAT Treatment of above two main issues:

  • Residential Accommodation – No VAT Charged
  • Serviced Accommodation – VAT at standard rate 5%
  • Composite Supply – Tax Treatment is same as for Principal Component
  • Mix Supply – Tax Treatment of each item is separate

Detailed Discussion on Accommodation provided to labor shall be classified as Residential or Serviced accommodation:

As per the applicable VAT laws in United Arab Emirates Residential buildings are exempt from Value Added Tax other than first sale of Residential Building which is zero rated.

Whereas

Commercial or other types of buildings shall include VAT at standard rate which is 5% as of April 2019.

So now the main question that arises is that Labor Accommodation provided by companies shall be treated as Residential or Commercial and other types of Buildings and standard VAT rates need to be charged.

Federal Tax Authority highlighted some of the conditions stated below for the purpose of proper VAT classification of labor accommodations which are:

Labor accommodation as Residential Property (Exempt or Zero Rated):

Following factors should be considered:

  1. Building shall be principal place of residence of the labors
  2. It is a building that is fixed to the ground and cannot be move
  3. The building is constructed or converted with lawful authority
  4. The building shall be not be similar to hotel, motel or serviced apartments for which services in addition to accommodation are provided.

Labor accommodation as Serviced Property (Standard Rated 5%):

Often residents are provided additional services on top of residence in such cases extent of additional services provided needs to be considered carefully in order to classify the building as either residential or commercial or serviced accommodation.

Services provided normally with residential accommodation

Following services are generally provided with residential buildings and shall not change the tax treatment of the property from residential to commercial:

  1. Cleaning of communal areas
  2. Maintenance
  3. Pest control
  4. Security
  5. Utilities
  6. Access to facilities within Building such as Gym and swimming pools etc.

Services provided indicating serviced accommodation

Additional services that may indicate that accommodation to be treated as serviced accommodation and charged at standard rate of 5% are:

  1. Telephone and Internet access
  2. Cleaning of rooms other than cleaning of communal areas
  3. Laundry services, including regular changing of bed linen
  4. Maintenance services other than those that are required for general upkeep of property’

Detailed Discussion on VAT treatment of additional services provided on top of accommodation:

Another important factor that needs to be considered in proper VAT treatment of labor accommodation is whether the services provided in addition to the accommodation are to be classified under single composite supply or as separate supplies. Reason

If the supply is single composite supply all the services are to be treated the same way as building either residential or serviced accommodation

In other case the services provided in addition to accommodation shall be treated separately. In that case there can be a situation where building is classified as residential and no VAT is charge however additional services provided are taxed at the standard rate of 5%.

Composite supply is defined by Federal Decree-Law No. 8 and cabinet decision 52 as:

  1. Composite supply exist where there is a supply of the following:
  2. Principal Component
  3. Component or components that are incidental to the main principal component but do not constitute item themselves.
  4. Price of different components are not separately charged by supplier
  5. All Components of supply are provided by a single supplier

Or

Where there is a supply that has two or more elements and it is impossible or unnatural to split them.

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