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May 15, 2026

This Public Clarification addresses the VAT treatment for the sale of a building where the purchaser subsequently changes its permitted use. It establishes that the VAT status of the supply—be it standard-rated, zero-rated, or exempt—is determined at the date of the initial sale and is unaffected by any later change in the building's use. The document clarifies that the original transaction's VAT treatment remains final. For instance, the sale of a hotel apartment remains standard-rated even if the buyer converts it to a residential unit. This guidance interprets key real estate provisions, including Articles 25, 45 and 46 of the VAT Decree-Law.

VATP018

VAT Public Clarification

Change in the permitted use of a building

Issue

The supply of a building may be standard-rated, zero-rated or exempt from VAT, depending on the nature of the building and the permitted use thereof at the date of supply.

Since VAT is a transaction-based tax, the VAT treatment shall be determined independently at each date of supply.

This Public Clarification clarifies the VAT treatment of the sale of a building and the subsequent use thereof by the purchaser.

Summary

The sale of a building constitutes the supply of a single indivisible good at the date of supply. If the purchaser subsequently changes the permitted use of the building, it does not impact on the VAT treatment of the preceding sale.

Consequently, where a building was sold as a serviced/hotel apartment and the purchaser subsequently change the permitted use of the building to residential use only, the preceding sale will remain subject to 5% VAT whereas the purchaser should not account for VAT on the subsequent exempt supply.

If a building was sold as a residential building but the permitted use is subsequently changed to use as a serviced/hotel apartment, the VAT treatment of the original sale will remain the same regardless of the purchaser's subsequent use of the building, i.e. exempt from VAT, except if it was the first supply of the building, in which case the supply may be zero-rated. After the permitted use is changed, the purchaser will have to account for 5% VAT on the supply of the building to a third party if the purchaser is a Taxable Person.

Detailed discussion

Legislative background

In this clarification, Federal Decree-Law No. 8 of 2017 on Value Added Tax is referred to as “Decree-Law” and Cabinet Decision No. 52 of 2017 on the Executive Regulations of the Federal Decree-Law No. 8 of 2017 on Value Added Tax is referred to as “Executive Regulations”.

According to Article 2, read with Article 3, of the Decree-Law, 5% VAT shall be imposed on every taxable supply made in the UAE by a Taxable Person unless the supply qualifies for zero-rating or exemption under the provisions of Title Six of the Decree-Law. The term 'Taxable Person' is defined in Article 1 of the Decree-Law as any person who is, or is required to be, registered for VAT in the UAE.