Owners' associations (OA) have been in a somewhat tricky position since the introduction of value added tax (VAT) in the UAE in January. The exact rules and regulations remain unclear and at the heart of this confusion lies the simple question of whether OAs are tax exempt or not. The catch 22 position revolves around whether OAs are deemed taxable entities or whether they fall outside of this domain, like many service providers, such as schools. If an OA fails to register it may be hit with a Dh20,000 fine for non-registration. However, if it undertakes to pay VAT but are subsequently judged to be exempt, it has to go about trying to recover paid taxes.
PW spoke to a few experts to get a clearer picture on the VAT situation.
Are OAs exempt?
The short answer to this question is no, although conditions apply. Last month the Federal Tax Authority (FTA) clarified that OAs that were operating independently from the developer or property management companies needed to register for VAT. Most OAs, largely governed by the Real Estate Regulatory Authority (Rera), remain unregistered for VAT amid confusion about its applicability on their services. Experts point out that services provided by OAs are seen as a taxable category and are subject to the standard VAT rates.
Given its ability to enter into contracts and transact on its own account, charges raised by the OA to the members represent a taxable supply and the OA should be required to register and charge VAT on the same.
Dispelling rumours and confusion surrounding the issue, Iqbal Malik, head of finance and administration at Stratum Owners Association Management, clarifies the two scenarios shared by the FTA.
“Scenario one clearly states that if an OA has a legal entity, and an owner appoints a property management company, which engages with third-party suppliers for property management services, then the charges that the OA incurs, whether from the property management company or from contracting services directly, will invite VAT,” says Malik. In which case OAs should register and then charge VAT to members based on the amount paid.
The second scenario, where the OA has no legal status, but has an ability to contract with third parties, Malik clarifies that the OA is formally registered as an OA and is governed by the joint property ownership Law No. 27 of 2007. This allows OAs to enter into contracts with third parties, and at the same time maintain accounts in the name of the OA. “Given its ability to enter into contracts and transact on its own account, charges raised by the OA to the members represent a taxable supply and the OA should be required to register and charge VAT on the same,” he adds.
The FTA has clearly stated that all owners' associations that are operating separately from the developer are required to register for VAT, providing that they fall within the mandatory registration parameters or Dh375,000 turnover per annum.
Jimmy Haoula, managing partner of BSA Ahmad Bin Hezeem & Associates, also cites the FTA’s statement regarding the status of OAs with respect to VAT: “The FTA has clearly stated that all owners' associations that are operating separately from the developer are required to register for VAT, providing that they fall within the mandatory registration parameters or Dh375,000 turnover per annum. They may also voluntarily register if they qualify with an annual turnover of between Dh87,500 and Dh375,000.”
Supporting this view is Kanagaraj Gurusamy, senior community manager at Deyaar Home Owners Association. He clarifies the understanding of the FTA directive on VAT for OA, saying, “Any OA that has a taxable annual turnover exceeding the Dh375,000 threshold is required to register for VAT. Additionally, service providers and utility owners will charge the OA 5 per cent VAT for their services, which has to be recovered from the owners through service charge invoicing.”
Service providers and utility owners will charge the OA 5 per cent VAT for their services, which has to be recovered from the owners through service charge invoicing.
So what’s the problem?
While the legal teams and some OAs seem to be clear on VAT, others feel it still warrants greater discussion and clarity. And the legal status of the OAs, rather the lack of it, seems to be an issue adding to the confusion.
“An OA is not a legal entity; it is unable to form contracts and it is a not for profit, therefore, it should be treated specifically by the authorities when it comes to applying VAT,” says Nicholas White, associate director of owners association at Asteco Property Management. “An OA has not received legal licence to become a legal entity, however, the FTA is of the opinion that an OA does have legal personality.”
At the time of going to press PW learnt that the FTA has confirmed that OAs are subject to VAT. White explained, “Given the most recent FTA VAT guide confirming this, we do not have the information on whether sufficient dialogue has occurred with the FTA to challenge this latest announcement in order to avoid the unnecessary burden for the owners of jointly owned property. Nevertheless, we believe that it is unwise to take no action given this recent development.”
Legal experts seem to agree that the VAT rationale for OAs does need some explanation. “I disagree that they should be required to register as they are not conducting ‘business’ as defined in the VAT law, nor are they a profit-making organisation,” says Haoula. “[They] merely provide a service to residential communities for the management and upkeep of the buildings. Owners' associations are effectively only collecting monies from tenants that are to be used for expenses on the building/community, whose expenses will attract VAT anyway.”
On the other hand, Stratum Owners Association Management, reportedly working very closely with the FTA on understanding the implications of VAT on OAs, believes a clearer understanding of OAs and their role and responsibilities is the need of the hour. “An OA is a separate legal entity consisting of all the owners of the units in a jointly owned property development,” says Malik. “The owners' association is established when title to the first unit is transferred from the developer to a party other than the developer and when the jointly owned property declaration is registered with the Dubai Land Department. The owners' association is usually charged with managing the development and in particular the common areas.”
Further shedding light on its legal status, he adds, “All individual owners of properties in a building or community are automatically the members of the OA. Tenants are not members of the OA but are still required to adhere to the community rules. An OA is a not-for-profit legal entity in its own right in the same manner as a company is a separate legal entity from its shareholders.”
An OA is not a legal entity; it is unable to form contracts and it is a not for profit, therefore, it should be treated specifically by the authorities when it comes to applying VAT.
The legal status is also implicit in the fact that once registered, the OA can sue and be sued, has the right to own and dispose of movable assets and enter into service agreements with the service providers, he further explains.
If OAs weren't exempt, what’s the implication?
It is worthwhile to explore what the implications could be when VAT is to be applied on OAs. In fact, legal teams say that the process of recovering VAT, in short its impact, has already been outlined by the FTA in its directives.
“The FTA is registering OAs and a tax registration number (TRN) is being issued to them,” says Malik. “Service providers charge VAT to the OA and OAs charge VAT to owners. As per our understanding, the service providers will be billing VAT with their service as a separate line item, which is booked in OA books as input VAT for which credit can be claimed from FTA. On the other hand, owners will be charged VAT on service charges as output VAT with the service charges billing. The difference of output VAT and input VAT will be paid/booked as receivable from the FTA on quarterly basis with the quarterly tax return.”
Haoula believes OAs themselves would not be affected greatly. “The budget of the OA wouldn’t change,” he says. “If for example the budget is Dh1 million yearly and that is collected from service charges from 1,000 owners at Dh1,000 per year, then the OA would need to simply charge each owner the applicable VAT extra so the owners would now pay Dh1,050.”
However it appears homeowners would bear the brunt of it, as the cost would get passed onto them in the form of increased service charges, without the option of passing it onto tenants.
“Residential property is exempt from VAT, so the homeowners will not be able to charge the VAT to the tenant, unless the tenancy agreement provides thereof,” says Haoula. “However, owners will no doubt increase the rental prices with the VAT amount now payable by the owner.”
The VAT effect
The possible implications of VAT on stakeholders such as owners' associations, individual homeowners and tenants.
1. The OA will issue service charge plus 5 per cent VAT but will not be able to claim 100 per cent. The invoice is based on a budget and good practice is to remain in funds, so conservative budgeting is usual. Deficit and special levies are to be avoided.
2. The submission of VAT returns holds liability. Due to the liability aspect, tax consultants may be required to complete returns, increasing cost.
3. Disproportionate increase of admin, time and cost impact compared with additional tax revenue created.
4. VAT is collected at point of invoicing. The OA has to wait for service charges to be paid by owners so there is a cash-flow issue. This has further implications for OAs in significant arrears.
5. The OA is not able to be the contracted party. Although it will be given a tax registration number (TRN) it will not be able to claim the input tax from service providers as the contracted party is not the OA and so the TRN will not match the entity for claiming purpose.
Source: Asteco Property Management