VAT in GCC

Sector Impact > Construction

Zero rated: Construction of new buildings will be zero rated. The supplier can claim the input tax credit on all the purchases done for the construction activity.

Regarding the construction of new buildings, the following goods and services are zero-rated:

  • Construction services relating to new buildings;
  • Goods supplied by the person supplying the construction service in the course of constructing a new building.

Construction of a new building includes an extension of an existing building, but excludes other work on existing buildings such as refurbishment, restoration and conversion.

A building is defined in the Executive Regulations as a “…residential, commercial or industrial building, such as a dwelling, offices, factories, workshops, retail stores, multi-storey car parks, power stations, oil refineries, liquified natural gas stations or oil fields.” A building is considered as “new” when it has not been occupied yet.

The Executive Regulations set out examples of services that qualify for the zero-rate as well as examples of services that do not qualify – as shown in the below table.

Qualifying for the zero-rate Not qualifying for the zero-rate
  • Construction works
  • Site clearance
  • New extension to an existing building
  • Services provided by engineers and surveyors and similar services of a supervisory nature

 
  • Demolition of existing buildings on the land on which the new building will be constructed
  • Architects’ and interior design fees
  • Restoration works
  • Any services supplied after the building has been completed

Goods qualifying for the zero rate are those which are supplied by the person constructing the new building in the course of the construction services. These goods must be used, installed or incorporated into the building or the land.

The Executive Regulations set out examples of goods that qualify for the zero rate as well as examples of goods that do not qualify – as shown in the following table.

Zero rate applicability for construction goods Qualifying for the zero-rate Not qualifying for the zero-rate
  • Building materials (e.g., concrete, building blocks, wood etc.)
  • Materials to construct raised flooring for computer server rooms
  • Fixtures and fittings to the extent they are permanently affixed to the building and cannot be removed without causing damage to the building or the fixtures
  • Goods for civil engineering works necessary for the development of the building including sewerage works, piping, roads and paths necessary for the proper use and enjoyment of the building and car parking for use by the building’s occupants and visitors
  • Goods to connect the building to water supplies and telecommunications services
  • Solar cells and related equipment to produce electricity and hot water for the building
  • Fixtures and equipment which are not permanently affixed to the building and which can be removed without damage to the building, or the fixtures or requirements, including: – Furniture that is not affixed to the building
      • Goods supplied for landscaping works
      • Swimming pools
      • Decorative lighting
      • Paintings, murals and other artwork
      • Carpets
      • Moveable partitions

It is expected that construction contracts for new building have some components that are subject to VAT at the zero-rate and others that are subject to VAT at the 5% standard rate. Where it is the case, it is required to apportion the agreed consideration, based on the fair market value, between the goods and services subject to VAT at the zero-rate and those subject to VAT at the 5% standard rate.

Sector VAT News Update

How will VAT affect the GCC’s construction sector?

Sector impact analysis is provisional based on the GCC Draft and may change when the country issues the relevant VAT laws.