Updated VAT Real Estate Guide in Bahrain  

VAT  Treatment in Bahrain, generally construction implies building stuff like a home, office, factory, warehouse, road, bridge, etc. Construction can include demolition, renovation/reconstruction of existing buildings or structures and site clearing activities as well.  Construction requires providing a construction service, but as part of such a service, it can also include supplying goods.

The following construction activities will be zero-rated as per VAT  Treatment in Bahrain VAT Law.

1. 1. Construction services for new buildings carried out by a registered company which is regardless of the type of building being built on (e.g. residential, commercial, industrial building), or the type of other construction work (e.g. civil engineering work); and
   2. Goods supplied by a person making a supply of construction services, in the course of providing construction services for a new building.

Any other supply of VAT relating to construction services or the supply of goods used for a building shall be subject to a 5% VAT rate.

What are the services qualifying for Zero Rate in Bahrain while constructing a new building?

The supply of construction services which, when supplied in relation to a new building, qualify for a zero rate shall include the following:

• Construction works
• Site clearance services
• A new extension to an existing building
• Services offered by engineers and surveyors, and related supervisory services; and
• Services required by the Ministry of Works, Municipal Affairs, and Urban Planning for obtaining a building permit.

What are the NOT qualifying for Zero Rate in Bahrain while constructing a new building?

The following services will not qualify for a zero rate shall include the following as per VAT  Treatment in Bahrain VAT Law:

• Services to demolish the land on which a new building will be built
• Fees for architects and interior design, whether done by a trained or licensed architect or interior designer; and
• Restoration works on an existing building, including restoration and refurbishment works on an existing structure, irrespective of the nature of such works.

A service of installing goods that do not qualify for zero-rating, even though it is supplied as part of construction service, would not apply for zero-rating on its own. This happens even though, as part of a bigger construction contract, the service is provided. Examples of services that do not qualify are those relating to:

• The furniture installation or assembly that is not affixed to the building
• Landscaping
• The construction of swimming pools
• The installation of movable partitions, carpets or decorative lighting; and
• Installing or hanging works of art.

There would be no zero-rating for the renting of equipment ( e.g. cranes, excavators, bulldozers, loaders, compressors, power generators, etc.) to be used by an individual providing construction services with respect to a new building and this is to be noted and need to be charged VAT at the rate of 5%.

Whether is the taxability of the services required to obtain a building permit in Bahrain?

As per the new version of the VAT Real estate guide, The zero-rate will apply to services provided by a taxable person to the extent that they are required to obtain a building permit from the Ministry of Works, Municipalities, and Urban Planning. Such services include:

• Provision of a certificate of the original survey and a certificate of layout plan
• Construction drawings of the foundations
• Engineering drawings of the plan
• Engineering drawings of the fronts and section

The zero-rate will apply to the services required to obtain a building permit, even if:

• The application for the building permit is rejected; or
• A building permit is issued, but the building is not built

Where other drawings (not needed by the Municipality) are used for the preparation of the engineering or construction drawings necessary for a building permit, the fee would be subject to the standard VAT rate for the supply of such drawings.

Whether snagging is subject to VAT in Bahrain?

Usually in the construction industry contract may include clauses whereby a retention amount may be withheld by the customer pending rectification of matters found as part of the snagging phase. If the builder corrects faults or quality problems at his expense on a snagging list, he will receive no extra payment for this job. As a result, no further supply of construction services is provided, and the builder would not be required to account for VAT on the work done by him in order to rectify the snags. 

Whether supplies made after the completion of a new building is Zero-rated in Bahrain?

When a new building is complete, the zero rate would not apply for any more supplies of construction services and goods. Completion is determined by taking the factors applicable to the specific project into account, including:

• When a completion certificate is issued in compliance with the contract,
• When the building is habitable or otherwise suitable for the purpose for which it was constructed
• If the building corresponds to approved plans and specifications
• When the construction is completed (including any variations to such approval) within the framework of the planning approval

It is important to determine the VAT due date for construction services, even when such services qualify for the zero-rate. This is because, for the VAT period within which the VAT due date falls, the value of the supply of the services (even if zero-rated) must be declared in the VAT return.

In addition, if the company makes taxable and exempt supplies, the VAT due date will be relevant in determining the value of taxable supplies when computing deductible input VAT on residual expenses.

There is a lot of confusion regarding the taxability related to the construction of the new building in the market. So, it is the responsibility of the companies to follow the correct treatment and to comply with all the rules and regulations as per Bahrain VAT Law.

Our Tax Experts in Emirates Chartered Accountants Group Bahrain believe in a proactive approach to tax advisory services with a cost-effective and tailor-made option that is preferred by businesses all over. Our team of professionals is well versed with the Bahrain VAT Law as well as the UAE VAT Law  They are also equipped with practical experience of implementing VAT in UAE and VAT in Bahrain.

VAT Treatment in Bahrain for Construction of a New Building

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