Charitable organizations are social or nonprofit organizations that do not aim to make profit. Let us understand the VAT treatment of the supply of charity buildings in the UAE.
What is a charity building?
A charitable building refers to any building or any part of a building exclusively used by charitable organizations for related charitable activities. Only charities listed in the Cabinet’s decision on designated charities are eligible to use buildings for “related charitable activities”. This means that if an organization uses a non-profit or charitable building, but it is not included in the cabinet decision, the building will not be regarded as a charity building.
What are related charity activities?
“Related charitable activities” are:
Under the approval of the Ministry of Community Development, or under the condition of being established as a charity under federal or emirate decree, by the charity in the course of its charitable goals or when it promotes its charitable activities in the UAE; or by the federal government or the emirate Licensed by the government to operate as a charity
Not for the benefit or benefit of the owners, members or shareholders of the charity
First supply of charity buildings
If the initial supply of a building or any part of a building is specifically designed for charity and is only used for related charitable activities, the zero supply of the building is zero. “First supply” includes the supply of buildings provided through sale or lease.
One thing to note here is that, unlike the value-added tax for the first delivery of residential buildings, there is no time limit and must be eligible for zero tax during the first delivery period. This is different from the value-added tax when residential buildings are first supplied, which should be supplied for the first time within 3 years from the date of completion.
No matter who the building is supplied to (for example: registered customers, non-registered customers, related parties, etc.), the first supply of residential buildings will be rated as zero.
Since the first supply of charity buildings is at zero tax rate, the supplier can recover all the value-added tax incurred in the construction of charity buildings.
Charity building provided subsequently
Any subsequent supply of buildings, whether they are sold or leased, will not be zeroed out because they do not meet the first supply conditions of buildings. Subsequent supply of charity buildings will be subject to value-added tax at the standard rate of 5%.
Since the subsequent charity buildings provided are also taxable supplies, the supplier will be able to recover the VAT paid for any expenses related to the charity buildings (such as maintenance and general maintenance costs).
Therefore, in order for a building to qualify as a charity building, certain prescribed conditions must be met. The first supply of charity buildings will be zero tax rate, and any subsequent supply of charity buildings will be subject to 5% value-added tax.