A Comprehensive Guide into Musataha Agreements and VAT Implications in the UAE 

A-Comprehensive-Guide-into-Musataha-Agreements-and-VAT-Implications-in-the-UAE

Mustaha Agreements play a vital role in real estate development in the UAE, as they provide investors with an amazing opportunity to build stable and secure investment-based projects and outline significant limitations and regulations on ownership of foreign land. In simpler words, this agreement aids individuals in utilizing others’ land for a longer period, often more than 10 years, which benefits both the state and proprietors at the same time.  

In addition, the Musataha Agreement grants the right to construct or develop buildings on other’s land but is subject to a few regulations, including registration, significant due payments, and more.  

However, regarding VAT Treatment, the UAE has introduced extensive VAT and excise tax, which is regulated at the emirate level, which will impact businesses that operate in those regions. Investors must determine the regulations and tax implications of the Musataha Agreements to proceed effortlessly with real-estate development projects in the UAE. 

What is Mustaha Agreement?  

A Musataha agreement refers to a land ownership contract that enables the holder, termed Musataha , to rent government-owned land for a period ranging from 10 years to 50 years. This agreement allows Musataha to develop buildings, invest in property, mortgage, and lease the land that belongs to a third party.  

However, in return, Musataha needs to pay the land owners a premium or share of profits generated from the land’s development. In addition, Musataha is held responsible for costs regarding land development, such as construction, maintenance, and even tax. The owner is also entitled to receive a share of the profit from land development as per the agreement specifications.  

VAT Treatment with Real-Estate Transactions

In the context of VAT implications, real-estate transactions are often treated as sales of goods, including the transfer of ownership or usage rights to other parties. However, the date of transactional supply is implied based on the regulations highlighted in Articles 24 and 25 of the VAT Decree Law.

A Comprehensive Guide into Musataha Agreements and VAT Implications in the UAE 

In short, Musataha agreements grant the right to construct on bare land. When the landowner leases land to the tenant for development, it is essential to determine whether the land is bare, partially completed, or already completed building civil engineering work.

Initially, land is considered bare land; however, as development occurs, the nature of supply changes, which ultimately impacts VAT treatment. As mentioned above, the supply of bare land is often VAT-exempt, and selling developed land is subject to standard VAT rates in the UAE.

How Does a Musataha Agreement differ from a real estate agreement?

While both agreements refer to the ownership and development of the land, VAT implications on real estate agreements and the Musataha agreement differ by determining factors like the nature of the land, registration, and more. Let’s understand these factors in detail.  

Nature of Land 

Bare Land: If the landlord leases the property under a 50-year registered Musataha agreement, then the VAT treatment will be implied by considering the nature of the land and the time of the supply. Even if the payments are made in installments for 10 years, it is still not considered a continuous supply and hence exempted from VAT.

Developed Land: After the development of buildings or progress with civil engineering works on the land, it is no longer considered bare land, and hence, VAT treatment changes to 5% for subsequent supplies for the developed land. 

Registration Status 

Registered Musataha Agreement: A registered Musataha agreement is considered an official contract of sale or a one-off lease. If the agreement is registered with the Land Department or Municipality, no adjustment to VAT treatment is needed.  

Unregistered Musataha Agreement: An unregistered Musataha agreement served as another lease agreement. Parties can request clarification from the Federal Tax Authority (FTA) if circumstances prevent or delay registration to determine the VAT treatment. 

VAT Implications 

The VAT implications on termination or changes in land status differ depending on whether the Musataha agreement was registered and whether the land remains bare or becomes developed during the lease period. 

In addition, cooperation between parties is vital to adjust VAT treatment if the nature of the land changes during the lease period, especially when transitioning from bare to developed land. 

Impact of VAT Treatment on Musataha Agreement  

As mentioned above, VAT treatment on Musataha agreements in UAE is determined by registration and the nature of the land. If your agreement is not registered with officials, both parties may seek clarification from FTA.  

For instance, in real estate transactions, varied VAT liabilities are applied depending on the property type being supplied. Commercial properties are subject to 5% VAT, new residential at 0%, existing properties, and bare land are exempt. Talking about Musataha projects, if bare land is leased and the land is developed under the Musataha agreement during this period, then VAT treatment would change to 5%.  

Whereas, if the date of supply for bare land is already triggered and ceased part-way through the lease, subsequent supplies are subject to VAT at the standard rate according to articles 25 and 26.  

Final Thoughts 

Musataha agreements in the UAE are land ownership contracts that specifically allows the holder to rent government-owned land for a certain period from 10 to 50 years, allowing them to develop buildings, invest in property, mortgage, and lease the land.  

Additionally, VAT treatment of these agreements is determined by the nature of the land and registration status, as well as VAT implications on termination or changes in land status. To learn more about VAT implications in detail, get in touch with our VAT consultants +971 4 352 8001 for thorough guidance .  

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