VAT, as a general consumption tax, will apply at 5% to all transactions of goods and services unless specifically exempted in Article (46) of the Federal Decree-Law No. (8) of 2017 on Value Added Tax or subject to a rate of Zero as per Article (45) of the Federal Decree-Law.
An owner of a residential building will not be able to recover VAT in respect of expenses related to the exempt supply of the residential buildings.
An owner of a commercial building will generally be able to recover VAT in respect of expenses related to the supply of the building.
The rent or sale of a residential part of the building shall be treated as zero-rated or exempt, depending on whether this is a first supply or a subsequent supply.
The rent or sale of a commercial part of the building shall be treated as subject to VAT at 5%.
The tax incurred by the owner on the building needs to be apportioned where there is an exempt supply, and the portion related to the taxable supply (at 0% and 5%) may be recovered.
Businesses that satisfy certain requirements covered under the Legislation (such as being resident in the UAE and being related/associated parties) will be able to register as a VAT group. For some businesses, VAT grouping will be a useful tool that would simplify accounting for VAT.
VAT-registered businesses will be able to reduce their output tax liability by the amount of VAT that relates to bad debt which has been written off by the VAT-registered business. The legislation will include the conditions and limitations concerning the use of this relief.
To avoid double taxation where second-hand goods are acquired by a registered person from an unregistered person for the purpose of resale, the VAT-registered person will be able to account for VAT on sales of second-hand goods with reference to the difference between the purchase price of the goods and the selling price of the goods (that is, the profit margin).
The VAT which must be accounted for by the registered person will be included in the profit margin. Further details of the conditions to be met in order to apply this mechanism can be found in the Executive Regulations of the Federal Decree-Law No.(8) of 2017 on Value Added Tax.
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