Treatment of VAT for the rent free period

Treatment of VAT for the Rent Free Period

Due to Global Pandemic of COVID-19, many business leaders, retail chains, free zones announces rent waive for three or six months to support business in UAE. In this blog we are explaining the treatment of free of cost supplies of rent for the three or six months.

As per Federal Decree Law No. (7) of 2017, rent on commercial properties is considered as standard rated supplies. But during the pandemic crisis, three to six months are declared as rent free months by authorities. We need to analyze what will be treatment of VAT for the rent free supplies from the Landlord and Tenant perspective. There are few doubts we need to clear for the treatment of this transaction like whether it is considered as zero rated supply instead of standard rated supplies and we need to report in Form 201 or whether it is considered as deemed supply or not.

For the clarity, it is not considered as deemed supply as the above situation is not covered under Article (11) of the Federal Decree Law No. (7) of 2017. In the same way Article (45) of the Act doesn’t covers the above mentioned supplies under zero rated supplies. So it is clear that free rent period supply is neither considered as zero rated nor deemed supply. Let’s understand the VAT accounting treatment of free rent benefit from the landlord and tenant perspective through example:-

ABC Ltd. owns a warehouse and leased out the same to XYZ Ltd. for one year, contract starts from 1st January 2020 to 31st December 2020 for AED 80,000. The rent is payable in 4 cheques which is due in January 2020, April 2020, July 2020 & October 2020. XYZ Ltd. already given post-dated cheques and January cheque is already cleared. Due to effect of COVID- 19 ABC Ltd. can provide two facilities one ABC Ltd. delay the payment of rent, and the new due date of the rent will be July 2020, October 2020 & January 2021 or ABC Ltd. can provide the discount of three month rent and there will be only two cheques due (i.e July & October).

In the first case the scenario will be that the reporting of rent supplies will be delayed by one quarter in landlord VAT return as the rent will be due July instead of April. In the second option, treatment of discount is considered on two basis whether the Tax Invoice is issued for the April rent or not. If the Tax Invoice is issued, then ABC Ltd. need to issue Tax Credit Note for the AED 20,000 to reduce the liability of Output Tax Liability. If the Tax Invoice is not issued then there will not be any need to issue Tax Credit Note.

VAT Accounting Treatment by Horizon Biz Consultancy

Though every business is facing challenges to manage cash flow and comply the law at the same time, it is good to take professional advice for any structural change and to assess the impact of the same. The way of doing business is changing rapidly and to cop-up with the same, business owners always require expert skillset. Horizon Biz Consultancy is carrying vintage of more than 60 years in the field of Tax & Finance Consultancy.

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