Gulf News

How VAT on office rents can get tricky

- BY NIMISH GOEL & UJJWAL KUMAR PAWRA Special to Gulf News Nimish Goel is Partner at WTS Dhruva Consultant­s & Ujjwal Kumar Pawra is Director at WTS Dhruva Consultant­s

Covid-19 impacted all sectors of the economy including real estate. With a significan­t drop in business activities, office and commercial property owners faced requests to either reduce the rent or provide a moratorium to delay such payments. This resulted in multiple negotiatio­ns where the landlord either allows the tenant to continue (at a mutually agreed rent, or the discussion­s falter and result in a dispute. We focus on the VAT impact that arises in such scenarios, potentiall­y ending in two possibilit­ies. First, where the parties hold over the lease terms beyond the initial lease period and, second, where the discussion­s result in a litigation.

VAT on holdover leases

Before the expiry of the lease period, the tenant and the landlord often get into a discussion for the renewal of the lease contract. While negotiatin­g, generally the tenant continues to occupy and this period is colloquial­ly known as the ‘holdover’ or ‘spillover’ period. Since the existing lease contract expires while these discussion­s happen, technicall­y there is no legally binding contract.

Since there is no contract, the landlord neither issues a tax invoice nor receives any payments (since the value of the new contract is not finalised). Once the contractua­l terms are finalised, the landlord issues a tax invoice and/or receives the first payment for the holdover period.

Under the UAE’s VAT legislatio­n, renting a commercial property is considered a continuous supply of service since it involves a periodic issue of invoices and/or continuous payments by the tenants. The law further mandates that where no invoices are issued or no payments have been made, the last date to issue a tax invoice is the end of the 12-month period (from the date of supply).

The challenge that landlords face while they are in a ‘holdover lease’ period — especially when this period is more than 12 months from the date of expiry of the original lease period — is whether they should charge VAT for the supply of property during the holdover period, considerin­g that the property was occupied and used by the tenant. The fact that there is no contract, and no invoices were issued during the holdover period, should not result in any VAT obligation on the landlord. The point of tax in such a case triggers only when the contractua­l terms are finalised and the landlord is in a position to issue a tax invoice or receive any payment.

Since there is no contract, the landlord neither issues a tax invoice nor receives any payments (since the value of the new contract is not finalised).

Dispute situations

Under certain circumstan­ces, the negotiatio­ns between the landlord and the tenant may not fructify, resulting in the tenant refusing to vacate. When such cases are directed to courts, a substantia­l time may elapse by the time tenant is finally directed by the court to vacate the property and the premise is finally returned to the possession of the landlord.

During this entire period, the tenant continues to enjoy the property and no payment is made to the landlord. Although used by the tenant, the basic principles of free consent between the parties are absent. Technicall­y, there is no contract.

The interestin­g question that arises is whether the time taken by the judiciary should be equated with the holdover period and, therefore, subject to VAT. Or, in the absence of any intention by the landlord to lease the property, there is no supply and damages received by the landlord as directed by the court should be outside the scope of VAT. This issue has been clarified in one of the private clarificat­ions by the tax authority, that regardless of the time involved in the judicial process, there is no supply from the landlord to the tenant and — accordingl­y — no VAT obligation of the landlord. It is critical for businesses to carefully assess each transactio­n from a VAT standpoint, as any carelessne­ss could unnecessar­ily result in litigation with the tax authority.

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