As per recent public clarification number VATP022 issued by Federal Tax Authority (“FTA”), Dubai Owners’ Associations are required to deregister from VAT due to implications from Law No. 6 of 2019 issued in September 2019 Concerning Ownership of Jointly Owned Real Property in the Emirate of Dubai (“Law No. 6”). Management Entities are responsible to fulfill VAT obligations for such properties.
- 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.
Requirement of Law 6
Under Article 49 of Law No. 6, 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.
Requirements of VAT law, its Executive Regulations and Tax procedure law
As per article 16(2) of VAT decree law and article 14(2) of Executive Regulations, 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.
As per Article 25(1)(d) of the Tax Procedures Law, the administrative penalty for failing to submit a deregistration application within the prescribed period is AED 10,000.
Owner associations to deregister
On the basis of Law 6 above all of the Owners’ Associations’ rights and obligations were transferred to Management Entities, the Owners’ Associations no longer make any taxable supplies.
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 administrative penalties.
Management Entities to Account for VAT
For VAT purposes, the Management Entity is not regarded as an agent but as a person supplying goods and services to the owners of the units (as a result of Law No. 6), thus Management Entity becomes a taxable person and under Article 65(1) of the Decree-Law is required to issue valid tax invoices to the recipients of these supplies.
The management of a Jointly Owned Real Property constitutes a taxable supply of services, which is subject to 5% VAT
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.
Management Entity, as a VAT registrant, is liable for any penalties which may arise as a result of non-compliance from VAT.
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Issue with VAT registration of Sole Establishments
A natural person may own a number of sole establishments. There has been uncertainty on whether each sole establishment needs to obtain VAT registration separately or whether all such establishments could be included under one VAT registration.
This Public Clarification clarifies the VAT registration obligations of a natural person in respect of its sole establishments.
A individual owning a number of sole establishments needs to obtain only one VAT registration for all its sole establishments and does not require separate VAT registrations for such establishments.
The Federal Tax Authority (‘FTA’) will review, in certain cases, the VAT registrations by taxable persons in respect of sole establishments and will inform them of the corrective steps to be taken, if any.
Meaning of Sole Establishment
A sole establishment (also referred to as sole proprietorship or المؤسسة الفردية ) is a legal form of business which is 100% owned by a natural person. A sole establishment does not have a legal personality that is independent of its owner and is accordingly considered to be the same person as its owner. It should be noted that this Public Clarification does not apply to a One-Person Company LLC or other similar legal entities, which are seen as distinct and separate legal persons from their owners (unless the applicable legislation treats such entity and the natural person as the same person).
For the avoidance of doubt, it should be noted that a legal person (e.g. a company) cannot own a sole establishment.
VAT registration obligations of Sole Establishments
A natural person may own a number of sole establishments, which may perhaps undertake different lines of business.
On the basis that a sole establishment does not have a legal personality that is independent or different from its owner, and that each person can obtain only one VAT registration, it is hereby clarified that a natural person should include all its sole establishments under one VAT registration. Therefore, separate VAT registrations should not be sought for the different sole establishments of the same owner.
The VAT registration in such cases should be obtained ideally in the name of the natural person that owns the sole establishments. However, if a natural person, owning multiple sole establishments, wishes to obtain the VAT registration in the name of one of its sole establishments, the person may apply to the FTA accordingly.
It is important to note that the taxable supplies by a natural person, as well as his sole establishment, must be considered collectively in order to determine the VAT registration obligations
Review of previous VAT registrations of sole establishments
The FTA notes that there are some instances where a natural person may have received separate VAT registrations for different sole establishments.
The FTA wishes to state that it will review such VAT registrations in certain cases and inform the relevant taxable persons of the corrective steps they should take, if any. It should be noted that for any VAT registrations received in the past, no action is required to amend the VAT registrations, until specifically directed by the FTA. For all future VAT registration applications, the applicants must conform to the position stated in this Public Clarification.
For the avoidance of doubt, please note that if a natural person owns one or more sole establishments, the value of supplies made by the natural person and all its sole establishments must be aggregated to assess whether the VAT registration threshold has been exceeded.
Consequently, if a registrant disregarded any of his sole establishments or his own taxable supplies for VAT purposes (for example, on the basis that the sole establishment or his taxable supplies did not reach the VAT registration threshold on a stand-alone basis), the registrant is required to inform the FTA of any undeclared output tax by submitting a voluntary disclosure in accordance with Article 10(1) of the Federal Law No. 7 of 2017 on Tax Procedures. 1
If the natural person and his sole establishments failed to register for VAT, even though the aggregate value of supplies listed in Article 19 of the Federal Decree-Law No 8 of 2017 on Value Added Tax (hereafter referred to as “Decree-Law”)2 made by the natural person and his sole establishment(s) exceeded the mandatory registration threshold of AED375,000, the natural person will be required to notify the FTA and corrective action must be taken to account for the outstanding VAT.
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Issue with VAT free special Offers
Numerous retailers are offering “VAT-free special offers” as promotions to entice prospective buyers to purchase goods or services within a promotional period.
Referring to “VAT-free special offers” is misleading and contrary to the VAT legislation, since the goods or services are not actually supplied free of VAT.
This Public Clarification clarifies the VAT treatment of promotions where the seller absorbs VAT on promotional goods. For purposes of this clarification, the term “promotional goods” refers to goods which are sold as part of a special promotion.
VAT registered businesses should not advertise taxable goods or services as free of VAT or sell such goods or services without accounting for 5% VAT, except where the supply qualifies for zero-rating.
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 the “Executive Regulation”, Federal Law No. 7 of 2017 on Tax Procedures 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 No.40”.
Liability to impose VAT
According to Article 2(1) of the Decree-Law, VAT shall be imposed on every taxable and deemed supply made by a taxable person. Article 1 of the Decree-Law defines the terms –
- “taxable person” as any person registered or obligated to register for tax purposes.
- “taxable supply” as a supply of goods or services for a consideration by a person conducting business in the United Arab Emirates (“UAE”), and does not include an exempt supply.
Consequently, where the seller is a taxable person, the seller is, according to Article 3 of the Decree-Law1, required to impose 5% VAT on the supply of all goods and services in the UAE, except where the Decree-Law explicitly provides for zero-rating or exemption.
Based on the above, any promotional campaign stating that the supply of promotional goods is “VAT-free” is misleading as the seller is obliged to impose VAT on these supplies. The seller may, however, make a commercial decision to offer a discount equivalent to the amount of VAT. As a consequence, VAT is always payable on taxable supplies and the seller is not entitled to choose whether or not VAT should be imposed on a supply.
Sellers may take a commercial decision to absorb VAT in order to make the price of promotional goods more attractive to potential buyers, these are commonly referred to as “VAT-on-us” promotions. In these instances the seller is regarded as granting a discount to its customer which is equal to the VAT amount imposed on the promotional goods or services.
According to Article 39 of the Decree-Law2, in the case of a discount, the value of the supply is reduced in proportion to the discount. Article 28(3) of the Executive Regulation3 confirms that the value of the discount is the amount by which the consideration is reduced.
If a motor vehicle’s normal price is AED105,000 and a special VAT-on-us promotional price is AED100,000, the seller is regarded as providing a AED5,000 discount to its customer.
VAT inclusive prices
According to Article 38 of the Decree-Law4, the advertised price of taxable supplies shall include the VAT.
Article 27(1) of the Executive Regulation5 confirms that, in the case of a taxable supply, the published prices shall be inclusive of VAT. According to Article 27(2) of the Executive Regulation, the taxable person may, however, declare VAT exclusive prices if the goods or services will be exported or where the customer is registered for VAT.
Even though a business may expressly advertise prices as “VAT-free” in respect of retail sales as part of business / marketing promotion labelling, for VAT purposes, the price charged to the customer shall include VAT. Consequently, the onus will be on the business to determine the correct amount of VAT payable. Further, businesses should comply with the rules in respect of publishing prices.
The amount paid by the customer for the promotional good will therefore constitute the VAT inclusive consideration, regardless of whether the promotion is published as “VAT-free” or not.
If during the promotional period a motor vehicle is advertised for AED100,000 “VAT- free”, the consideration for the supply is AED100,000. The seller is therefore required to account for AED4,761.90 VAT (VAT = 100,000 / 21 = 4,761.90) in its tax return, regardless of the wording used in the promotional campaign.
All tax invoices issued in respect of taxable promotional goods or services shall meet all the requirement set out in Article 59 of the Executive Regulation^6. Consequently, as prescribed in the Article, the seller is required to reflect the rate of tax, tax amount and the gross amount payable in AED for each taxable good or service supplied on the tax invoice.
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