Legal Principle on the Calculation of Value Added Tax in Construction Contracts

Facts of the Case
The respondent company filed a lawsuit before the Court of First Instance against the appellant company, requesting that it be compelled to pay a certain amount with 12% interest and to return four post-dated guarantee checks. The respondent stated that the appellant, as the main contractor, had assigned it to carry out certain works in the Al Barsha area, which it completed, including both primary and additional works. The amount claimed, which included taxes, expenses, and compensation, was allegedly due. The appellant, however, refused to pay the remaining balance and did not return the checks despite completion of the work.

The court appointed an expert, followed by an expert committee. Based on the expert report, the court ruled that the appellant was obliged to pay the amount due and return the checks, rejecting the appellant’s counterclaim for compensation arising from delay and alleged non-compliant execution.

The appellant appealed, but the Court of Appeal rejected the appeal and upheld the first instance ruling. Subsequently, the appellant filed a cassation appeal seeking annulment of the judgment, dismissal of the original claim, and granting of its counterclaims.

Grounds of Appeal
The appellant argued that the judgment erred in applying the law and lacked sufficient reasoning. It contended that the expert report was based on an incorrect premise, calculating AED 272,169.34 as Value Added Tax (VAT) despite the appellant allegedly having paid the tax in previous invoices. The appellant maintained that VAT should be calculated only on the unpaid portion of the works rather than on the total executed works. It further argued that the expert ignored objections concerning the subcontractor’s failure to adhere to the schedule and delays in completion, and that the judgment relied on the report without addressing its substantive objections.

Court’s Opinion and Reasoning
The Court of Cassation held that the appellant’s complaints were unfounded. It affirmed that a construction contract binds both parties to perform in accordance with the agreement and in good faith, pursuant to Article 246 of the Civil Transactions Law. The main contractor’s obligation to pay due amounts includes VAT arising therefrom.

The court clarified that under Federal Decree-Law No. 8 of 2017, VAT is imposed on the value of works actually executed, as an indirect tax due upon the supply of the service. The main contractor cannot claim that the tax has been paid unless supported by proper tax invoices meeting all legal requirements. Mere assertions of payment without evidence do not affect the tax liability.

The expert committee’s report concluded that VAT should be calculated on all executed works. The appellant’s objection was therefore based on a misunderstanding of the tax’s nature and calculation method. The report also confirmed that the subcontractor performed the works properly, and that the refusal to pay was unjustified. The court further noted that the appellant’s objections and statements amounted to subjective arguments not admissible before the Court of Cassation. Accepting the expert report falls within the trial court’s discretionary authority when grounded on sound technical reasoning. Accordingly, the contested judgment correctly applied the law and was free of error or deficiency.

Conclusion and Legal Principle
The Court of Cassation affirmed that VAT in construction contracts is calculated on the works actually executed (supply value), not merely on amounts paid. The main contractor cannot avoid VAT on the basis of partial payment unless fully supported by proper tax invoices covering all works. The court also emphasized the trial court’s authority in assessing expert reports, which is not required to address every objection in detail.

Therefore, in the UAE, VAT in construction contracts is calculated based on the actual supply value of executed works, as an indirect tax at 5% imposed under Federal Decree-Law No. 8 of 2017 on goods and services at each stage of the supply chain. The final consumer bears the tax burden, while companies are responsible for calculating and collecting it for the government. The main contractor is exempt from paying VAT only if proven with valid and complete tax invoices. Payment cannot be justified on the basis that VAT is calculated on amounts paid rather than on works executed.