Update on Jointly Owned Properties (Owners Association) for UAE VAT
June 12, 2023
Update on Jointly Owned Properties (Owners Association) for UAE VAT
Since Inception of UAE VAT in the year 2018 there have been amendments in the VAT implications for the taxable entities. One such Clarification has come from FTA after the issue of Law No. 6 (2019) concerning Ownership of Jointly Owned Property in the Emirates of Dubai.
As per Law No 6 of 2019 all the rights and obligations of Dubai Owners’ Association on 3rd November 2019, were transferred to Management Entities and that Dubai Owners’ Association will no longer have taxable Supplies. They were therefore requested and required to apply for VAT de registration within a time period of 20 business days as prescribed by the legislation which was no later than 4th December 2019.
Let’s understand a little more about the Law No. 6.
The Law No. 6 was published on 4th September 2019 and was effective on 3rd November 2019 which is 60 days after the publication. This applicability of this Law is for all Master Projects and Jointly Owned Real Property in Dubai which also includes those that are in Special Development Zone and Free Zones.
The “Jointly Owned Real Property” as defined by Article 2 of Law No. 6 is a building as a whole including the parts and annexes that have been allocated for common use and it also includes the land on which the building is constructed and/or the land is subdivided into units or plots for individual ownership.
Under the same Article as per the provisions of this Law, the ‘Management Entity’ is defined as one who manages the Common Facilities, Jointly Owned Real Property and the common parts. It means that this would also include the developers, management companies and/or hotel project management companies on case to case basis.
The “Unit” as per this Article is a shop, office, flat, warehouse, floor, a whole or part of the plot land, a town house, independent house that’s a part of Jointly Owned Real Property which in turn is intended for commercial, residential, industrial or any other purpose / use.
The Law No. 6 also has Article 49 under which all the rights and obligations of Owners’ Association will be transferred to Management Entities that arose before the effective date of the Law. Hence, the Owners’ Association will be superseded by the Management Entity in the business of managing the Jointly Owned Real Property including the Units.
VAT deregistration of Owners’ Association:
Based on the Law as all the rights and obligations of Owners’ Association were transferred to Management Entity, the Owners’ Association are no more making a taxable supplies. As per Article 21(1) of the Decree Law any registrant who has stopped taxable supplies can apply for VAT deregistration. Accordingly, Article 14(2) of the Executive Regulation required that a registrant applies for the deregistration within 20 business days from the date it stops making taxable income or where the value of the taxable income in the past 12 months is less than AED 187,500/-.
Based on the above information released the registered Dubai Owners’ Association were to apply for deregistration no later than 4th December 2019. However, in case they fail to do so as per the above mentioned criteria they would face an administrative penalty of AED. 10,000/- as described under Table 1 – Penalty 4 of the Appendix to Cabinet Resolution 40.
Accounting of VAT for Management Entity:
For VAT purposes, the Management Entity, according to Law 6, is not just seen as someone who looks after a building for its owners. They are also considered the ones providing goods and services to the owners.
Even if there are restrictions on how service charges are used, managing Jointly Owned Real Property is seen as a taxable service, subject to 5% VAT. The Management Entity must issue a tax invoice to the recipient, or they face penalties, even if the documents are invalid or issued by a third party.
The penalty for not issuing valid tax invoices or credit notes is AED 5,000. It’s crucial to review the formats and content of these documents, including those issued by third parties on behalf of the Management Entity.
All amounts received as service charges by the Management Entity must be reported, and the related VAT should be filled in Box 1b of its VAT Return. The Management Entity can also reclaim VAT paid on goods and services for managing Jointly Owned Real Property with proper documentation.
Submitting incorrect tax returns can result in penalties of AED 3,000 for the first offense and AED 5,000 for subsequent ones. If there’s a tax benefit from the incorrect return, a percentage-based penalty applies. It’s advisable to carefully review returns or seek help from tax and financial experts to avoid penalties or consider deregistration.
At RSN Finance, we always strive to comply with Federal Tax Authorities’ laws and regulations to keep our clients penalty-free.
