Case Study-Rent Free During COVID 19 Pandemic– Is It Deemed Supply and Taxable?

COVID 19 UAE Impact in Tax

Rent Free During COVID 19 Pandemic and Its Tax Treatment-Case Study

Background:

In the wake of the Global pandemic, COVID 19, the government took quick actions to make reassuring noises of support for businesses. Many authorities came up with major relief packages for companies including companies operating in free zones/designated zones. It includes rent postponement up to six months to help them to overcome COVID-19 challenges.

We would like to invite your attention to the VAT impacts of these decisions of the Government through a case study.

The fact of the case:

A UAE national owns a commercial building in Dubai. The entire building has been leased out to M/s. XYZ Enterprises LLC, a retail trading group in the UAE.  The lease agreement has been entered for one year starting from 1st January 2020 to 31st December 2020. As per the contract, the tenant is required to pay a yearly lease rent of AED 120,000/- payable in four instalments.

As per the contract, the payment due dates is 1st January 2020, 1st April 2020, 1st July 2020, 1st October 2020. M/s. XYZ Enterprises LLC paid the first instalment of the rent of AED 30,000 as on the agreed date

. For the balance instalments, it issued post-dated cheques each amounting to AED 30,000/- the dated beginning of each quarter. Later, from 15th March 2020 due to the outbreak of COVID 19 pandemic across the world considering the safety and health of the staff and the general public the management of the company decided to temporarily stop the operations till 30th June 2020.

As per the contract, the second instalment of the lease rentals will become due for payment on 1st April 2020. However, the management of the company realized that the company is facing severe cash flow issues and that it may not be able to honour the second cheque.

The company, therefore, approached the landlord requesting him either to reschedule payment due dates of the instalments of the rent for the remaining three quarters or to provide any concession in the rent amount during the shutdown period. As a VAT registered taxable person, what will be the VAT treatment to be adopted by the Landlord in the following two situations:

  1. The landlord agreed with the tenant not to make the payment of the second instalment of the rent considering the extraordinary situation; the company is facing. However, the company should make the balance two instalments due as per the agreed due date in the contract.
  2. The landlord agreed to revise the payment due dates of the balance three instalments of lease rent. The revised due dates will be 1st July 2020, 1St October 2020 and 1st January 2021.

VAT treatment in the case of option (a):

  • Leasing of real estate shall be considered as a supply of goods for UAE VAT purpose, therefore, the supply of commercial building by the landlord to M/s XYZ Enterprises LLC shall be taxable supplies of goods.
  • Here, the lease contract has been entered for one year for which the consideration of AED 120,000/- is payable in four instalments. Therefore, if the landlord agrees to reduce the total consideration by an amount equivalent to three months’ rent (i.e. AED 30,000/-), then such reduction can be considered as a reduction in supply value by way of discount.

Now let us discuss how such discount shall be treated for the purpose of VAT:

  • There can be two possible scenarios in this regard:
  1. the discount is provided by the landlord after the Tax invoice is issued and
  2. the discount is provided by the landlord before the Tax Invoice is issued.
  • If the discount is provided by the landlord after, issuing the Tax invoice, then the landlord will have to issue a Tax Credit Note for an amount equivalent to three months’ rent as there is a reduction of output tax liability. Here in the above case, if the date of supply is triggered for the second instalment of AED 30,000/-, then the landlord shall issue a tax credit note for AED 30,000/- and reverse the tax liability.
  • If the discount is provided before issuing the Tax Invoice, then there is no need to issue a tax credit note because there is no output tax amount to reduce.
  • While reporting in the VAT return Form 201, the net impact on the output tax under both alternatives will be the same (i.e. output tax will be Nil) 

VAT treatment in the case of Option (b):

  • Here the second instalment as per the revised date will become due only on 1st July 2020. Therefore, the output tax on the second instalment AED 30,000/ will become due on 1st July 2020 only, provided; no other triggering events such as receipt of payment or issue of tax invoice, etc. were occurred before such date.

Note: Where the landlord grants a rent-free period in return for no consideration, the rent-free period does not normally constitute a supply for VAT purposes. This is only the case where the tenant is not obliged or required to provide anything in return, and the tenant is not a related party. However, if a tenant undertakes to provide anything to the landlord in return for the rent-free period, this would represent a barter transaction.

For example, a landlord may grant a rent-free period to a tenant in return for the tenant agreeing to refurbish the property. In such cases, both supplies will be of equal value, but will not necessarily have the same VAT liability (for example, where the landlord is supplying residential property). Where VAT is charged on the value of the barter transaction this would be recoverable subject to the normal rules.

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