In the previous article, we learned about the VAT treatment of residential and commercial building supplies. There may be actual situations where buildings or land are used for different purposes, that is, one part is used for residential purposes and the other part is used for commercial purposes. These attributes are called mixed-use development. In this article, let us understand the VAT on the supply of mixed-use development projects.
What is mixed-use development?
Mixed-use development projects refer to clear and distinct areas on buildings or land. These areas are allocated to different uses and are subject to different value-added tax treatments when provided.
For example: a building with retail units on the ground floor, office space on the middle floor, and residential units on the top floor is a mixed-use development.
VAT on mixed-use development projects
If different parts of a mixed-use development project are provided, the value-added tax liability assumed depends on the purpose of the specific part of the building.
If the part provided is used for commercial purposes, the supply should be taxed at 5% value-added tax, and if the part is used for residential purposes, it is necessary to check whether the supply is the first supply or the subsequent supply. If this is the first supply of the property within 3 years from the date of completion, the supply will be level zero. If the supply is a subsequent supply, the supply is exempt from VAT.
When a mixed-use development is sold in its entirety, the consideration received needs to be distributed among the different parts of the building supplied. The consideration related to the residential part of the building will be deemed to be exempt from VAT (or zero rate at the time of first supply), and the consideration related to the commercial part of the building shall be liable for VAT @ 5%.
For example: Noor Properties, a registered trader in Dubai, provided buildings to Shaan Spaces, an unregistered trader, at a price of Dh5,00,000. The ground floor of the building is used for commercial purposes and includes 2 shops. The first floor of the building is used for residential purposes and consists of two houses. The property will be offered for the first time within 6 years after the completion date.
Here, Noor Properties received 5 million dirhams for consideration for mixed-use development, part of which was used for commercial and residential purposes. Therefore, Noor Properties must achieve the consideration ratio for commercial and residential purposes. Noor Properties concluded that the consideration ratio for residential use was AED 2,00,000, and the consideration ratio for commercial use was AED 3,00,000.
For the consideration for commercial use, which is Dh3,00,000, Noor Properties must pay 5% value-added tax, which is Dh15,000.
Part of the consideration for residential use is AED 2,00,000. Although this is the first supply of the property, it has been completed for 6 years. Therefore, this part of the price will be tax-free.
To learn more about VAT on the supply of residential properties, please read our article “VAT on the supply of residential buildings”.
To learn more about VAT on the supply of commercial housing, please read our article “VAT on the supply of commercial housing”.
Therefore, the supply VAT for mixed-use development projects depends on the use of the part supplied. Depending on whether the part is used for commercial or residential purposes, the value-added tax on the supplies will be applied.