In the wake of the global pandemic, COVID-19, many government authorities introduced major relief packages for companies in the UAE. These measures, including rent postponement of up to six months, aimed to address the challenges of Rent-Free During COVID-19 initiatives and support businesses in overcoming financial hardships.
Let’s discuss the VAT impacts of the rent postponement decision of the Government through a case study.
The fact of the case
A UAE national owns a commercial building in Abu Dhabi. The building has been leased out to M/s. ABC Enterprises LLC, a trading group in the UAE. The lease agreement has been entered for two years starting from 1st January 2020 to 31st December 2021. As per the agreement, the tenant is required to pay a yearly lease rent of AED 180,000/- payable in four installments for two years.
As per the contract, the payment due dates is 1st January, 1st April, 1st July & 1st October. M/s. ABC Enterprises LLC paid the first installment of the rent of AED 45,000 as of the agreed date. For the balance installments, it issued post-dated cheques each amounting to AED 45,000/- 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 10th July 2020.
As per the contract, the second installment of the lease rentals was due for payment on 1st April 2020. However, the management realized that the company was facing severe cash flow issues and might not be able to pay the second cheque. The company, therefore, requested the landlord to either reschedule the payment due dates for the remaining three quarters or provide relief in the rent amount during the shutdown period. Considering the concept of Rent-Free During COVID-19, as a VAT-registered taxable person, what VAT treatment should the landlord adopt in the following two situations?
- The landlord agreed to revise the payment schedule of the balance three installments of lease rent. The revised due dates will be 1st July 2020, 1St October 2020 and 1st January 2021.
- The landlord agreed with the tenant not to make the payment of the second installment of the rent considering the covid-19 outbreaks. However, the company should make the balance two installments due as per the agreed due date in the contract.
VAT treatment in the case of Option (b):
- Here the second installment as per the revised schedule will become due only on 1st July 2020. Therefore, the output tax on the second installment AED 45,000/ 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.
VAT treatment in the case of option (b):
- 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 ABC Enterprises LLC shall be taxable supplies of goods.
- Here, the lease contract has been entered for two years for which the consideration of AED 180,000/- is payable in four installments. Therefore, if the landlord agrees to reduce the total consideration by an amount equivalent to three months’ rent (i.e. AED 45,000/-), then such reduction can be considered as a reduction in supply value by way of discount.
Now let us concentrate on how such discount shall be treated for the purpose of VAT:
- There can be two possible scenarios in this regard:
- the discount is provided by the landlord after the Tax invoice is issued and
- 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 installment of AED 45,000/-, then the landlord shall issue a tax credit note for AED 45,000/- 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)
