VAT on supply of charitable buildings
A charity is a society or association of public welfare, which does not aim to make a profit. Let us understand the VAT treatment on supply of charitable buildings in UAE.
What is a charitable building?
A charitable building means any building, or any part of a building, that is specifically designed to be used by a charity and solely for a relevant charitable activity. Only charities which are listed in a decision of the cabinet regarding Designated Charitable Bodies will be eligible to use a building for a 'relevant charitable activity'. This means that where a building is used by an organisation which is not for profit or has charitable objectives, but which is not listed within a decision of the cabinet, it will not be regarded as a charitable building.
What is a relevant charitable activity?
A 'relevant charitable activity' is:
- undertaken by a charity in the course or furtherance of its charitable objectives to carry out a charitable activity in the UAE, as approved by the Ministry of Community Development, or under the conditions of its establishment as a charity under the Federal or Emirate Decree, or as licensed to operate as a charity by an agency of the Federal or Emirate Governments
- not for the purpose of profit or benefit to any proprietor, member, or shareholder of the charity
First supply of a charitable building
The first supply of a building, or any part of a building, is zero-rated if the building was specifically designed to be used by a charity and solely for a relevant charitable activity. The ‘first supply’ includes a supply of the building by either sale or lease.
A point to note here is that unlike VAT on first supply of residential buildings, there is no time limit during which the first supply must be made in order to qualify for zero-rating. This is unlike VAT on first supply of residential buildings, where the first supply should be made within 3 years from the date of completion.
The first supply of a residential building will be zero rated, regardless of who the building is supplied to (For example: A registered customer, a non-registered customer, a related party, etc.).
As the first supply of a charitable building is zero rated, the supplier can recover the VAT paid on costs of constructing the charitable building in full.
Subsequent supply of a charitable building
Any subsequent supplies of the building, either by sale or lease, will not be zero rated, as they will not qualify as the first supply of the building. A subsequent supply of a charitable building will be subject to VAT at the standard rate of 5%.
Since the subsequent supply of a charitable building is also a taxable supply, the supplier will be able to recover the VAT paid on any costs related to the charitable building, such as maintenance and general upkeep costs.
Hence, certain laid down conditions need to be satisfied in order for a building to qualify as a charitable building. The first supply of a charitable building will be zero rated, whereas any subsequent supply of a charitable building will be subject to VAT @ 5%.