UAE VAT on additional Gross Floor Area

VAT on additional GFA

Over the past years, the UAE has witnessed exponential growth in the development of real estate projects, and it is known for its flamboyant infrastructure. The master developers are creating new communities having residential, commercial, and leisure establishments. In addition, the plot of land is also sold to other builders for similar development purposes. This brings us to an important question on the taxability of Gross Floor Area (‘GFA’).

What is GFA

Prior to the development of any community, the master developer is required to get approval from the Dubai Authority. The developer is required to submit a plan of the project bifurcated into plots having numbers, land usage, area, GFA, number of buildings, number of dwelling units, and maximum building height. Basis the development, GFA is allotted to each plot as well as overall GFA for the project is assigned. Basis such approval, guidelines for the overall support infrastructure i.e. number of parks, open areas, roads, etc. is also assigned for each project. 

The master developers sell individual plots along with the permitted GFAi.e.the permissible construction limit on the plot. Interestingly, the value of land is typically determined based on permissible GFA on the plot. These details form part of the Sales & Purchase Agreement (‘SPA’) which is registered with the Lands Department.

Requirement of additional GFA

In many instances, the buyer (post-execution of the SPA) approaches the developer requesting for allotment of additional GFA. The additional GFA is for consideration. For e.g.as per the SPA, the permissible limit was to construct 15 floors accommodating X number of people and now the owner wishes to construct 20 floors accommodating Y number of people. The arbitrage for GFA is requested by the owner from the developer.

In such cases, the master developers approach the respective authority for modification of the Master Plan approved. Based on the revised permitted GFA, the master developer allots additional GFA to the buyer basis, and construction is started by the owner.

There may be multiple reasons for a request for additional GFA such as a change in construction plan, etc. In many cases, the plot would have been resold and additional GFA is being requested by the new owner. This brings us to the possible taxability of the additional consideration received by the Master Developer in lieu of additional GFA sold:

1. Scenario I –Can the original SPA be amended?
2. Scenario II – Is allotment of additional GFA a separate supply?

Scenario I – Can the original SPA be amended?

At the time of execution of SPA, certain conditions such as terms of payment, plot details, and GFA would have been mentioned in the contract which is also registered with the Dubai Lands Department (‘DLD’). A view may be adopted that allotment of additional SPA is by way of amending the original SPA. Therefore, any additional consideration should take the color of the original supply which was the sale of bare land. Thus the additional consideration received should also be VAT exempt. However, this is not a straight-forward simple solution as it may trigger the following issues:

• A sale of real estate is an indivisible supply, it should get triggered under Article 25 of the UAE VAT Law. The date of supply would have been triggered on the signing of the SPA and the same would have been reported by the Master Developer in its VAT return. The amendment would have to be separately reported.
• Is it permissible to amend the SPA post facto. Thus the Legal Team is required to be approached.
• It may impact the DLD fee which is computed on the sale value of the SPA and required to be paid by the buyer.

Scenario II – Is allotment of additional GFA a separate supply?

Alternatively, allotment of additional GFA may be considered as a new supply altogether and not be linked with the sale of the original plot of land. This is on the basis that the existing transaction was complete on registering the original SPA with the DLD. Any subsequent request is a fresh allotment which is to be considered as a ‘right is being provided/ permission is being granted by the Master Developer to the current owner of the plot. The UAE VAT Law considers granting, assignment, cessation, or surrender of a right as a supply of services, and thereby the additional consideration should be subject to VAT at 5%. 

VAT on Real Estate has been the most complex around the world. With complexities increasing, it is imperative for businesses to involve the respective teams to determine the nature of supply and adopt correct taxability.

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News Courtesy: gccfintax.com