Dubai Owners' Associations and Management Entities - VATP022
VATP022
VAT Public Clarification
Dubai Owners' Associations and Management Entities
Issue
Law No. 6 of 2019 Concerning Ownership of Jointly Owned Real Property in the Emirate of Dubai ("Law No. 6") was issued on 4 September 2019 and has a significant impact on Dubai Owners' Associations and Management Entities.
As a result of Law No. 6, Dubai Owners' Associations no longer make taxable supplies and are, therefore, required to deregister for VAT. There are, however, numerous Dubai Owners' Associations that are still registered for VAT.
This Public Clarification clarifies the VAT implications of Law No. 6 on Dubai Owners' Associations and Management Entities.
Summary
On 3 November 2019, all rights and obligations of Dubai Owners' Associations were transferred to Management Entities, which resulted in Dubai Owners' Associations no longer making taxable supplies.
Dubai Owners' Associations were, therefore, required to apply for VAT deregistration within the period prescribed in the tax legislation of 20 business days; that is, no later than 4 December 2019.
Management Entities are regarded as making supplies to the owners of Jointly Owned Real Property and required to fulfill VAT obligations in this regard, including the issuing of valid tax invoices and VAT reporting.
Detailed discussion
In this clarification, Federal Decree-Law No. 8 of 2017 on Value Added Tax is referred to as "Decree- Law", Cabinet Decision No. 52 of 2017 on the Executive Regulation of the Federal Decree-Law No. 8 of 2017 on Value Added Tax and its amendments is referred to as "Executive Regulation", Federal Law No. 7 of 2017 on Tax Procedures Tax is referred to as "Tax Procedures Law", and Cabinet Resolution No. 40 of 2017 on Administrative Penalties for Violations of Tax Laws in the UAE is referred to as "Cabinet Resolution 40".
Law No. 6
Law No. 6 was published on 4 September 2019 and became effective 60 days thereafter; that is, on 3 November 2019. This Law applies to all Master Projects and Jointly Owned Real Property in Dubai, including those in Special Development Zones and in free zones.
Article 2 of Law No. 6 defines the term "Jointly Owned Real Property" as a building, including the parts and appurtenances allocated for common use, and the land on which that building is constructed; or land which is subdivided into units or land plots intended for individual ownership.
The term "Management Entity" means an entity in charge of managing common facilities, Jointly Owned Real Property, or common parts in accordance with the provisions of this Law. This includes developers, management companies, or hotel project management companies, as the case may be.
The term "Unit" is defined as a flat, shop, office, warehouse, floor, whole or part of a land plot, town house, or independent house that constitutes part of Jointly Owned Real Property and is intended for residential, commercial, industrial, or any other use.
Under Article 49 of Law No. 6,[1] all rights and obligations of Owners' Associations which arose before the effective date of that Law had to be transferred to the Management Entities. The Management Entity will, therefore, supersede the Owners' Associations in the business of managing the Jointly Owned Real Property, including Units.
Owners' Associations - VAT deregistration
On the basis that all of the Owners' Associations' rights and obligations were transferred to Management Entities, the Owners' Associations no longer make any taxable supplies.
According to Article 21(1) of the Decree-Law,[2] a registrant shall apply for tax deregistration if he stops making taxable supplies.
Article 14(2) of the Executive Regulation[3] requires that a registrant applies for deregistration within 20 business days from the date the registrant stops making taxable supplies or where the value of taxable supplies made over the past 12 months is less than AED 187,500.
Based on the above, VAT registered Dubai Owners' Associations were required to apply for deregistration no later than 4 December 2019.
Any VAT registered Owners' Association that failed to apply for VAT deregistration within 20 business days from the date it stopped making taxable supplies is liable for an administrative penalty under Article 25(1)(d) of the Tax Procedures Law.[4] According to Table 1 â Penalty 4 of the Appendix to Cabinet Resolution 40, the administrative penalty for failing to submit a deregistration application within the prescribed period is AED 10,000.
Management Entities - Accounting for VAT
For VAT purposes, the Management Entity is not regarded as an agent who is just managing the building on behalf of the owners of the units but, as a result of Law No. 6, as the person supplying goods and services to the owners of the units.
The management of a Jointly Owned Real Property constitutes a taxable supply of services, which is subject to 5% VAT, regardless of whether there are limitations on the use of service charges collected.
As a registrant making taxable supplies, the Management Entity, under Article 65(1) of the Decree-Law[5] is required to issue valid tax invoices to the recipients of these supplies.
If the Management Entity fails to issue valid tax invoices and tax credit notes (where applicable), the Management Entity would be liable for administrative penalties, regardless of whether the Management Entity issued the invalid documents or whether the documents were issued via any other third party system.
Table 3 of the Appendix to Cabinet Resolution 40[6] states that the administrative penalty for failing to issue valid tax invoices and tax credit notes is AED 5,000 per document. It is, therefore, highly recommended to review the format and content of tax invoices and tax credit notes issued, including the templates used by a third-party system issuing these documents on behalf of the Management Entity.
The Management Entity is required to report the amounts received (in the form of service charges or otherwise) and the related VAT amount in Box 1b of its VAT return.
The Management Entity is entitled, under Article 54(1)(a) of the Decree-Law,[7] to recover VAT paid in respect of goods and services acquired to manage the Jointly Owned Real Property, provided the it obtains and retains valid tax invoices addressed to the Management Entity.
According to Article 25(1)(j) of the Tax Procedures Law,[8] the Management Entity, as a VAT registrant, is liable for any penalties which may arise as a result of submitting incorrect tax returns, including instances where VAT was not declared on service fees charged to owners.
According to Table 1 â Penalty 10 of the Appendix to Cabinet Resolution 40,[9] two penalties apply in this case; that is a fixed penalty (AED 3,000 for the first time and AED 5,000 in the case of repetition) and a percentage-based penalty if the Management Entity enjoyed a tax benefit as a result of submitting an incorrect return. If the incorrect tax return resulted in unpaid tax due, Penalty 9[10] may also apply.
This Public Clarification issued by the FTA is meant to clarify certain aspects related to the implementation of the Federal Law No. 7 of 2017 on Tax Procedures, Federal Decree-Law No. 8 of 2017 on Value Added Tax and their Executive Regulations.
This Public Clarification states the position of the FTA and neither amends nor seeks to amend any provision of the aforementioned legislation. Therefore, it is effective as of the date of implementation of the relevant legislation, unless stated otherwise.
Legislative References:
[1] Article 49 of Law No. 6 states that all rights and obligations of Owners' Associations, arising before the effective date of this Law, are hereby transferred to Management Entities.
[2] Article 21(1) of the Decree-Law states that a Registrant shall apply to the Authority for tax deregistration in any of the following cases:
If he stops making taxable supplies.
[3] Article 14(2) of the Executive Regulation states that the Authority shall accept a registrant's application for deregistration where the two following conditions are met:
The Registrant stops making supplies referred to in Article 19 of the Decree- Law and does not expect to make any such supplies over the next 12-month period.
The value of supplies referred to in Article 19 of the Decree-Law made, or taxable expenses incurred, by the registrant over the previous 12-months is less than the voluntary registration threshold and the Authority is satisfied that his supplies, according to the provisions of the Decree-Law, or taxable expenses, expected over the next 30 days, are not expected to exceed the voluntary registration threshold.
[4] Article 25(1)(d) of the Tax Procedures Law states that the Authority shall issue an Administrative Penalties Assessment for a person and notify him within (5) five business days for any of the following violations:
The failure of the registrant to submit a deregistration application within the timeframe specified in the Tax Law.
[5] Article 65(1) of the Decree-Law states that a registrant making a taxable supply shall issue an original tax invoice and deliver it to the recipient of goods or recipient of services.
[6] Article 54(1)(a) of the Decree-Law states that the input tax that is recoverable by a taxable person for any tax period is the total of input tax paid for goods and services which are used or intended to be used for making any of the following:
Taxable supplies.
[7] Table 3 of the Appendix to Cabinet Resolution 40:
Failure by the taxable person to issue the tax invoice or an alternative document when making any supply â 5,000 for each document.
Failure by the taxable person to issue the tax credit note or an alternative document when making any supply â 5,000 for each document.
[8] Article 25(1)(j) of the Tax Procedures Law states that the Authority shall issue an Administrative Penalties Assessment for a person and notify him within (5) five business days for any of the following violations:
The submittal of an incorrect tax return by the registrant.
[9] Table 1 â Penalty 10 of the Appendix to Cabinet Resolution 40:
The submittal of an incorrect tax return by the registrant.
Two penalties are applied:
Fixed penalty of:
(3,000) for the first time.
(5,000) in case of repetition
Percentage based penalty shall be applied on the amount unpaid to the Authority due to the error and resulting in a tax benefit as follows:
50% if the registrant does not make a voluntary disclosure or he made the voluntary disclosure after being notified of the tax audit and the Authority has started the tax audit process, or after being asked for information relating to the tax audit, whichever takes place first.
30% if the registrant makes the voluntary disclosure after being notified of the tax audit and before the Authority starts the tax audit.
5% if the registrant makes a voluntary disclosure before being notified of the tax audit by the Authority
[10] Table 1 â Penalty 9 of the Appendix to Cabinet Resolution 40:
The failure of the taxable person to settle the payable tax stated in the submitted tax return or tax assessment he was notified of, within the timeframe specified in the tax law.
The Taxable Person shall be obligated to pay a late payment penalty consisting of:
2% of the unpaid tax is due immediately once the payment of payable tax is late;
4% is due on the seventh day following the deadline for payment, on the amount of tax which is still unpaid;
1% daily penalty charged on any amount that is still unpaid one calendar month following the deadline for payment with upper ceiling of 300%.