Is a mixed-use building taxed for VAT as residential or commercial?

7. Mixed use developments 7.1. What is a mixed-use development? A mixed-use development is a building or plot of land which has clear and distinct areas which are put to different uses which would have a different VAT treatment when supplied. For example, a building which has retail units on the ground floor level, office or commercial space on the middle floors of the building and residential units on the top floor would be considered a mixed-use development. Where a distinct part of a mixed-use development is supplied, the VAT liability applicable to the supply shall depend on the use of the part of the building which is being supplied i.e. the supply of a commercial unit shall be taxable at the standard rate, whilst the supply of a residential unit (other than the first supply) shall be exempt from VAT. Where a mixed use-development is sold in its entirety, it shall be necessary to apportion the consideration received between the different parts of the building. The value of consideration relating to the residential part of the building shall be treated as exempt from VAT (or zero-rated, where the supply is the first supply), and the value of consideration relating to the commercial part of the building shall be treated as standard rated. 7.2. VAT recovery on development costs Input tax incurred on the development cost of new commercial real estate is recoverable in full, given that supplies of that building shall be taxable. This means that developers will be able to recover VAT over the duration of the development of the building. Where a taxable person incurs the costs of constructing a residential building, all of the VAT incurred on the costs of such development shall be recoverable in full on the basis that the costs relate to the zero-rated first supply. Any future supplies of the building by that taxable person (e.g. a subsequent lease, which would be exempt from VAT after the first supply) shall be ignored for the purposes of input tax recovery. As a result of the above, any VAT incurred on the construction of a mixed-use development should be recoverable in full. 7.3. VAT recovery on repair & maintenance costs Input tax incurred on the repair and maintenance costs of a property which is used for wholly commercial purposes is recoverable in full. Input tax incurred on the repairs and maintenance of a property which is used for wholly residential purposes is not recoverable. Where input tax is incurred on a property which is used for both commercial and residential purposes, the taxpayer is required to directly attribute the VAT on costs 19 VAT Guide | Real Estate | VATGRE1

Article 37 – Residential buildings 23 1. The phrase “residential building” means a building intended and designed for human occupation, including: a. Any building or part of a building that the person occupies, or that it can be foreseen that a person will occupy, as their principal place of residence. b. Residential accommodation for students or school pupils. c. Residential accommodation for armed forces and police. d. Orphanages, nursing homes, and rest homes. 2. A “Residential building” does not include any of the following: a. Any place that is not a building fixed to the ground and can be moved without being damaged. 23 Article amended as per Cabinet Decision No. 100 of 2024. Cabinet Decision No. 52 of 2017 and its amendments – As published by the Ministry of Finance 29 b. Any building that is used as a hotel, motel, bed and breakfast establishment, or hospital or the like. c. A hotel apartment or serviced apartment or the like. d. Any building constructed or converted without lawful authority. 3. A building shall be considered as a residential building if a small proportion of it is used as an office or workspace by the occupants, if it includes garages and gardens used in conjunction with it, or it includes any other features that may be considered to comprise part of the residential building.

Article 39 – Zero-rating Converted Residential Building 1. The first supply of a building, or any part of a building, which is converted to a residential building shall be subject to the zero rate provided that the supply takes place within 3 years of the completion of the conversion and the original building, or any part of it, was not used as a residential building and did not comprise part of a residential building within 5 five years prior to the conversion work commencing. 2. The presence of shared or common facilities, or dividing walls or similar features in a residential building should not cause the residential building to be considered or any part thereon as part of a pre-existing residential building.