19 Apr Rent in UAE During COVID-19
In the aftermath of the Global Pandemic, COVID-19, the Government has taken decisive steps to bring about encouraging noise of business support. Many authorities have established large compensation programs for businesses, even businesses working in free-zone areas / designated areas. This requires a rent postponement of up to six months to enable them resolve the uncertainties of COVID-19.
We would like to draw your attention to the VAT impacts of the abovementioned decisions of the UAE Government through a situational scenario of rent in UAE below.
ABC Enterprise LLC is renting an entire building owned by XYZ Holdings and has a lease agreement that has been concluded for a term of one year from 1 January 2020 to 31 December 2020.
Pursuant to the lease, ABC Enterprise LLC is expected to pay an annual rent of AED 140 000 payable in four rent installments with the following due dates: 1st of January, April, July and October 2020. For the first quarter, your business paid the first rent installment of the contract. As per contract, last remaining rent payments should be issued in post-dated checks each in the sum of AED 35,000.
Unfortunately, the rising threat of COVID 19 pandemic has spread across, if not all, most parts of the world and XYZ Holdings will temporarily hold all operations and transactions from March 15 2020 to June 30 2020. This action was made to ensure the safety and health of the employees and the general public. But since the business contract rent due date is on April 1, 2020 and with the current cash flow issues, ABC Enterprise LLC demanded for the rescheduling of the payment due dates of the installments of the rent for the remaining three quarters or the granting of some adjustment in the sum of the rent during the shutdown duration.
As a VAT registered taxable business, there are VAT treatment XYZ Holdings can adopt in these situations:
- XYZ Holdings agreed with the tenant to reschedule the second installment of the rent due to the COVID 19 pandemic affecting the tenants. However, XYZ Holdings will make the balance of the two installments due in keeping with the negotiated due date of the contract.
- XYZ Holdings decided to amend the payment due dates of the three rent installments of the rent. The extended deadlines will be July 1, 2020, October 1, 2020 and January 1, 2021.
VAT treatment in the case of option (a):
- Renting of real estate is deemed to be a supply of Services is directly connected with the real estate.
- In this case, the lease contract has been entered into for a term of one year for which the payment of AED 120 000/-is payable into 4 rent installments. If XYZ Holdings decides to decrease the overall valuation by a sum equal to three months’ rent (i.e. AED 30,000/-), the decrease can be defined as a decline in the value of the supply by means of discount.
POSSIBLE SCENARIOS ON HOW THIS DISCOUNT WILL BE USED FOR THE PURPOSES OF VAT
- The discount is offered by XYZ Holdings after the tax invoice has been given
- The discount is given by XYZ Holdings right before the tax invoice is released
-If the discount is granted by XYZ Holdings after the tax invoice has been released, XYZ Holdings will be required to submit a tax credit notice for a sum equivalent to three months’ rent since there is a decrease in output tax liability.
-There is no need to issue a tax credit note if the discount is granted before the tax invoice is released, since there is no output tax amount to be diminished.
-When reporting on the VAT return Form 201, the net effect on output tax under either of the alternatives would be the same.
VAT treatment in the case of option (b):
- The second installment as per the updated date will only be due on July 1, 2020. Therefore, the second rent installment of AED 30,000 output tax will only be due on 1 July 2020 provided that there aren’t any other triggering incidents, such as issue of tax invoice or receipt of payment etc., have occurred prior to that date.