VAT implications for the real estate

Alkesh Joshi and Ameera al Siyabi –

THE term real estate refers to land, the buildings on the land and the natural resources such as water and minerals associated with the land.
Real estate can generally be sub categorised into three main segments: Bare land, commercial real estate and residential real estate. So how does VAT affect each of these segments?
Bare land: For a piece of land to be considered as bare land for VAT purposes, it should not be covered by a completed building, partially completed building or a civil engineering work.
Generally, around the world, the supply of bare land by either sale or lease is VAT exempt. The interesting bit lies in establishing whether a piece of land can really qualify as bare land.
Commercial real estate:
Around the world, commercial real estate constitutes of properties that are used specifically for business-related purposes (income-related or industrial proposes) such as office spaces, hotels, resorts, restaurants, warehouses, retail store buildings, shopping malls, medical centres, etc. Generally, sale or lease of commercial property attracts VAT on the sale value or rental amount. In most cases, the recipient is a business and able to claim back the input VAT (when registered).
Residential real estate:
A residential real estate is a building that is used and designed for human occupations and includes (but is not limited to) single-family homes, multi-family homes, condos and nursing homes. The VAT treatment applied on residential properties varies around the world. One would need to look at four different scenarios for a residential property i.e. first sale after construction, first lease, subsequent sale and subsequent leasing of a residential property. Generally subsequent leasing or subsequent sale of a residential property is VAT exempt in most parts of the world, while some countries tax the first sale or first lease of a residential property.
Mixed-use real estate:
A mixed-use property is a term describing a building or a plot of land which blends two or more different type of uses (commercial, residential, institutional, entertainment), and each use may have a different VAT treatment when supplied. For example, a building where ground floor is used for renting shops while the residential apartments on the other floors are leased. How would VAT be applied in this case?
For mixed-use development, the VAT liability will depend on the use of the specific part of the building. In the example above, the rent of the commercial property on ground floor (shops) would attract VAT while the rent of the residential property should be VAT exempt.
Other VAT peculiarities around real estate:
As the supply of real estate does not include the movement of the real estate, the place of supply is considered as the place where the property is located thereby subjecting the supply of real estate to the VAT under the jurisdiction where it is located, irrespective of the status of the residency of the buyer or the seller. The applicability of local VAT is not limited to just the estate but is generally extended to the services which are directly associated with real estate such as a supply of Services involving the preparation, coordination and performance of construction, destruction, maintenance, conversion and similar work.
Fortunately, the Oman VAT law appears to have provided a relief on residential property wherein the first lease, the subsequent lease or the subsequent sale of a residential property should be treated as VAT exempt.
More details regarding the VAT treatment on real estate in Oman is expected in the impending VAT Executive Regulations.
In the coming weeks we will provide more insights into the impact on business and industry so stay tuned for more articles on VAT from EY Oman.
[Alkesh Joshi is Partner — Oman Tax Leader & MENA Energy Tax Leader at EY (email: Alkesh.Joshi@om.ey.com), while co-author Ameera al Siyabi is Assistant Manager — Indirect Tax at EY]