Bahrain updates guidance on VAT treatment of real estate

The most substantial changes to the guidance (50-page / 1.1MB PDF) relate to zero-rated construction works and related goods. The NBR has updated its procedural requirements in respect of 'new building' certificates; and clarified how zero-rating will be applied to advance and instalment payments, together with the extensions of old buildings.

Construction services and associated goods provided in relation to new buildings are zero-rated for VAT purposes in Bahrain. In order to qualify for zero-rating, the NBR requires the supplier to obtain a certificate, or a certified copy of the original certificate, stating that the building meets the criteria required to be classified as a 'new building' as set out in Article 76 of the Bahrain VAT regulations, together with a copy of the building permit. This certificate should be prepared by the main contractor or the property owner

Dubai-based tax expert Joanne Clarke of Pinsent Masons, the law firm behind Out-Law, said that this requirement was set by the NBR itself, and not specified by the Bahrain VAT law or related regulations.

"Originally, the requirement to obtain a certificate applied to subcontractors only," she said. "This obligation has now been extended to include all supplies of construction services - i.e. the main contractor in addition to subcontractors. In the event that such a certificate is not received from the owner, the main contractor can prepare the certificate itself."

"In addition, the amended guide goes further by stating that any invoice issued in advance of meeting the certificate requirements should include a charge to VAT at 5%. This VAT may only be reversed upon receipt of a certificate; and where the recipient has not yet deducted such VAT in a periodic VAT return. Conclusively, this would mean that once the VAT charged has been deducted by the recipient of the construction services, the right to issue a VAT credit note, which would be processed by both parties on their periodic VAT returns, in order to correct the VAT position, as set out within Articles 28 and 41 of the Bahrain VAT law, and Articles 35 and 54 of the Bahrain VAT regulations, appears to be removed."

"Similarly, the guide now more clearly states that the NBR will seek to apply the standard rate of VAT of 5% in the absence of the certificate requirements being met – i.e., that it will remove the right to zero-rating, even where the construction services and building meet the criteria set out within the regulations. These are two interesting points on the removal of rights granted under the law, especially for any businesses providing construction services in the region which may face the risk of penalties being issued by the NBR if such certificates are not obtained and retained for each project. Of course, it is yet to be determined whether such an approach by the NBR would be supported by the courts, if challenged," she said.

If only part of the contract qualifies for zero-rating, the supplier must perform an apportionment calculation to determine how much of the supply will be zero-rated and how much will be taxable at the standard rate.

"The amendments provide comments on the application of normal VAT principles such as the VAT treatment of advance payments, installment payments, apportionment of consideration for mixed supplies etc., to the provision of construction services," said Clarke. "It particularly deals with how to apply these principles when the construction services partly fall within the zero-rating and are partly liable at 5%."

"One key amendment is in relation to an extension of an old building where certain construction works would be required to be undertaken on the old building in order for the extension to be completed. The amendment introduces a new test where certain aspects of the construction works on the old building are 'needed for, and used as part of, the extension', and in such cases, a 'fair and reasonable' portion of such works may avail of the zero-rating. The NBR has suggested that floor area of the old building and the extension be an appropriate apportionment method, but that the method which best reflects the 'expected use' of such costs should be used. This is in essence a concessionary extension of the zero-rating for construction services by the NBR," she said.

The revised guidance also provides further examples of transactions that the NBR will not view as a 'supply' of real estate. These include provision of permission to use a specific area, such as shelf space or the site of a vending machine; short-term retail and promotional stands rented for a period of less than one month; and mooring rights for boats and ships and rental of jetties. The guidance also states that land reclamation is not a 'building' for the purposes of the new building zero-rating; and clarifies that the zero rate is applicable to the provision of ready-mix concrete.

Joanne Clarke said that these clarifications and the provision of further examples by the NBR were helpful for taxpayers, particularly given that Bahrain is the first Gulf Cooperation Council (GCC) state to introduce a VAT exemption for the supply of all property, whether by sale or lease. However she indicated that are not particularly surprising, given that similar treatments are applied in mature VAT regimes across the globe.

"The UAE and KSA have limited their exemptions to certain transactions in residential property and bare land," she said.

"As a result of this exemption for real estate, it now becomes much more important for the NBR to define the scope of 'real estate', as all transactions not falling within the definition would be liable to the standard rate of 5%. This is important in terms of businesses correctly charging VAT where it is due, but also in terms of their deduction entitlement for VAT on costs, which would not be available in the case of exempt transactions in real estate," she said.

The last amendment to the guide was to clarify that reclaimed land should not be viewed as a "new building" when considering the zero-rating for construction works on new buildings.

"Given the frequent reclamation of land across the GCC, including Bahrain, the land reclamation clarification is an important one in terms of the scope of the zero-rating for construction services. Reclamation services and reclaimed land have already been an issue for consideration in the region. The effect of reclamation services on the 'status' of the land and it being categorised as 'developed', 'partially developed' or 'bare land' was also a question relevant for the UAE VAT regime which has an exemption for the supply of bare land and zero-ratings for certain first supplies of completed residential/charitable buildings," she said.