Oman: VAT guide for real estate sector

The tax authority of Oman released a guide concerning value added tax (VAT) for the real estate sector.

The guide is intended to explain the application of VAT to transactions in the real estate sector.

The following tables summarize the information contained in the VAT guide.

“Mixed-use” refers to real estate or plots of land that have separate portions or areas that are used for different purposes. For instance, real estate that has commercial shops on the ground floor, commercial offices on the first floors, and residential units on the upper floors is considered as being designed for mixed use. The supply of each portion or section may be subject to different VAT treatment, depending on the use of that portion (i.e., commercial or residential).

When mixed-use real estate is sold in its entirety, it is necessary to allocate the consideration according to the different portions of the real estate. Accordingly, consideration for the residential part of the real estate will be treated as VAT-exempt (if a re-sale) or subject to the standard rate (if a first sale) and consideration for the commercial part of the real estate will be treated as standard-rated.

Undeveloped land is land on which there are no installations, man-made structures or completed structures above the surface or underground. Conversely, land on which there are installations, man-made structures or completed structures above its surface or underground is considered to be developed land.

In order to determine whether the land is developed, a building is considered as an above-ground structure or installation when its construction progresses beyond the foundation level. The sale or lease of the land at this stage is no longer a supply of undeveloped land.

• Construction that takes place on the ground or in its subsoil (e.g., roads, bridges, and pipes to distribute water and electricity) is sufficient to cause the land to be treated as developed.
• Agricultural land that is covered with necessary construction to allow it to operate it as a farm (e.g., irrigation systems, roads, etc.) is considered to be developed land.
• Land prepared for operation as a permanent car park is considered as developed land.
• However, if a plot of land is only fenced and enclosed with walls to allow construction to begin, the land does not qualify as developed land.

• Car parks: Renting of car parks is subject to VAT at the standard rate of 5%. However, if the car park is a part of a single supply of real estate (e.g., with residential or commercial real estate), then it will be subject to the same VAT treatment as the supply of the real estate.
• Service charges related to real estate: The building owner or developer of a residential complex may impose fees on owners or tenants for various services such as maintenance, electricity, internet, water, administrative services, commissions, etc. Such fees are treated as consideration for additional services and thus are subject to VAT at the standard rate of 5%. When such service is considered part of a single supply of real estate, then it will be subject to the same VAT treatment as the supply of the real estate.
• Real estate owned by individuals: The VAT law does not exempt individuals who own real estate in Oman from complying with its provisions. Individuals undertaking an economic activity, such as renting or selling real estate, are required to assess their VAT obligations and comply with the rules.
• Lease of undeveloped land for development purposes: When a landlord leases a plot of land to a tenant who intends to develop it, the landlord may supply bare land when it is first leased to the tenant, but as soon as the lessee begins to develop the land, the nature of the supply changes. As soon as structures or installations are erected on the land, or part of completed structures are erected above its surface or underground, the landlord is deemed to have supplied developed land. In such cases, it is necessary to compute VAT at the standard rate on payments relating to the period after the change in the nature of the supply.
• Real estate related services by non-residents: If real estate-related services are provided by a non-resident supplier to a registered taxable person in Oman, the taxable person is required to compute VAT under the reverse-charge mechanism. If the real estate-related services are provided by a non-resident supplier to a non-taxable person in Oman, the non-resident supplier is obliged to register for VAT in Oman. The monetary threshold for registrations does not apply to non-resident suppliers making taxable supplies in Oman. When the real estate constitutes a fixed establishment of the non-resident supplier under the Oman VAT legislation, the non-resident supplier is considered as a resident in Oman and will therefore be subject to the monetary threshold for mandatory registrations.
• Real estate located in special zones: The place of supply with regard to real estate (including the sale and lease of real estate) is the location where the real estate is located. Therefore, when a supply is of real estate located in a special zone, the place of supply is Oman. The supply of real estate located in special zones is eligible for a zero rate, subject to conditions specified in this regard. Read TaxNewsFlash

• Construction cost of real estate: Input VAT incurred on construction of new commercial real estate by a taxable person is fully recoverable, since all the intended supplies of such real estate are taxable. Developers will be entitled to a refund of VAT on expenditure incurred during the development phase. Input VAT incurred on construction of new residential real estate by a taxable person is also fully recoverable on the basis that it relates to the first taxable sale subject to VAT at the standard rate. Subsequent supplies of the real estate by that taxable person are to be ignored.
• Expenses associated with the resale of residential real estate: When a supplier incurs input VAT on expenses associated with the resale of residential real estate (such as broker fees) or on overhead costs (such as property maintenance), such expenses are considered as directly related to exempt supplies. Accordingly, the supplier is not eligible to deduct input VAT on these expenses. However, the supplier is eligible to deduct input VAT on such expenses directly related to the first sale of residential real estate (which is standard rated).
• Repair and maintenance expense: Input VAT on repair and maintenance expenses for real estate used entirely for commercial purposes is fully recoverable; entirely for residential purposes is not recoverable; and for both commercial and residential purposes, then the common input VAT is to be apportioned in order to determine the amount deductible. For example, when a building houses leased shops and residential apartments, input VAT on repair and maintenance expense can be recovered in relation to the shops and is to be foregone in relation to residential apartments. Common input VAT (i.e., which is used for both the commercial and residential sections) is partially deductible.

• Scope of construction services: Construction services are generally work conducted for the construction of buildings or infrastructure and other installations, including demolition and restoration. These services include services related to work performed by architecture, project management, and craftsmen professionals. These services may also include supply of goods as a part of the service.
• VAT on construction services: Construction services are subject to VAT at the standard rate of 5%, except when such services are supplied to special zones and are eligible for zero-rating. The VAT treatment applies regardless of the type of building being constructed.
• Tax due date for supply of construction services: Separate rules apply with regard to one-time supplies and continuous or consecutive supplies.
• Date of supply of retention payments/guarantees: Construction contracts often include a clause allowing the customer to retain a percentage of the contract value until the completion of the project, in order to determine that the supplier executes the contract properly and rectifies defects, if any. Often the customer does not pay the retained amount until the expiry of a specific period that is agreed upon in advance. In some instances, when the customer is not satisfied with the quality of work, the customer may not pay the retained amounts to the supplier. There are no special rules for determining the tax due date with respect to retained payments. Therefore, when the construction services result in periodic payments or invoices, the tax due date is to be determined as the earliest of: (1) the date of receipt of payment (of the retained amount); (2) the payment due date (for the retained amount) shown on the tax invoice; or (3) 12 months from the date of completion of the project (determined according to the contract). When the construction services are a one-time supply, the tax due date is be determined as the earliest of: (1) the date of receipt of payment; (2) the date of completion of service (determined according to the contract); or (3) the date of issuance of tax invoice for the supply.
• VAT on supplies to correct construction defects: Customers often retain guarantee payments (retention money) to cover potential defects that may occur in the building, during or after construction. If not satisfied with the quality of work, the customer may ask the supplier to correct the defects at the supplier expense, or contract with another supplier to correct the defects. If the original supplier corrects these defects at its own expense (for no additional consideration), the work to rectify such defects will be considered a part of the original supply, and not subject to VAT. However, if the customer contracts with another supplier to correct these defects, or the original supplier corrects these defects for additional consideration, this will be considered as a separate supply, and VAT will be due on such supply. If the customer does not pay the retention money to the supplier, VAT is not due on the unpaid amount, and the supplier has the right to issue a tax credit note to correct the VAT due when VAT has already been computed thereon, or resort to bad debt relief if eligible.
• Partially completed building: A building is usually considered completed on the date the building completion certificate is officially approved. However, if the building is occupied before such date, the building will be deemed to be completed on the date the building was occupied. Sale of a partially completed commercial building will be subject to VAT at the standard rate unless it qualifies as a transfer of business.

The VAT treatment of transactions in the real estate sector depends on several factors—including the type of property, the use of property, payment terms, liquidated damages, retentions, accounting treatment, etc. The contract terms are equally important to distinguish the substance from the form and ascertain the correct VAT position. One size does not fit all. Therefore, businesses need to examine their VAT positions adopted considering in the VAT guide. In addition, there are several other issues that merit consideration, and that have not been clarified in the guide.

Read an October 2021 report prepared by the KPMG member firm in Oman