As we close the first week of February 2018, the impact of the UAE’s newly introduced Value Added Tax (VAT) has already been felt across different areas of our daily lives, from the price of a takeaway to doing the weekly shop. However, today we are taking a look at how VAT will be affecting the UAE property market and, perhaps more interestingly, what facets of the UAE real estate market fall under VAT exemptions.
residential property VAT in the UAE
Firstly, it is important to identify what counts as a residential property before determining if you are expected to pay VAT. There is a clear distinction between VAT on commercial and residential properties.
According to the Federal Tax Authority (FTA), the following are residential buildings:
- Villas, townhouses and apartments that are not serviced
- Housing for students and labourers
- Accommodation for the police and other armed forces
- Nursing homes, rest homes and orphanages
For Property Owners Transacting On The Secondary Market
If the property or building is purely residential and does not encompass any other business, the owner of the said property cannot charge VAT on rent or sale of the same. Subsequently, the owner has no recourse to tax returns for these types of transactions, when occurring on the secondary or resale property market.
However, owners should note that this VAT exemption extends only to the rent and sale of such properties. You are still expected pay VAT in the UAE for services such as maintenance and upkeep of the property, agency commission fees, owners association costs as well as any property management services that may be utilised.
Once again, a tenant’s rent is VAT exempt. However, a tenant can still expect to shell out VAT on services such as water, electricity, gas, air conditioning and of course, agency fees.
Government services, such as property registrations, also fall under VAT exemptions, so only the usual fees will be charged.
Investors and buyers who are concerned about how VAT will affect their purchases on the primary market need not worry about costs being passed on to them. For residential developments, there is no VAT on the property, for the first three years from completion. So, developers can recover the VAT they are charged on things like design, materials, construction and contracting as they form part of the developer’s business costs. In fact, in the few launches that have already been seen in 2018, developers have not noticeably passed on any VAT to the buyer.
commercial property VAT in the UAE
As per the FTA, the following are classified as commercial properties in the UAE:
- Serviced residences
- Buildings used for healthcare
- Schools and universities
- Short-term leases that are six months and shorter
For Property Owners
The owners of such properties will need to register for VAT. They can charge the normal levy of 5% VAT on the property to buyers. If the owner incurs any expenses borne out of renting a commercial property, he or she will be able to recover it.
The buyer, however, will be able to recover this VAT, on their tax return. However, the onus is on the buyer to keep a check on what the property is being used for, for a period of 10 years. If the use of the building changes, whatever VAT was recovered may need to be adjusted.
When dealing with commercial property, the VAT will apply to both the primary and secondary markets.
According to Dubai property expert, Mario Volpi, “The issue of VAT becomes a matter of cash flow, so in theory, should not affect the value of real estate units and/or property prices in general. The advantage for the government to balance the financial books is far more advantageous and will outweigh any negativity in sentiment that the introduction of VAT may bring.”
It’s still early days for the implementation of VAT in the UAE, so is naturally come confusion about VAT exemptions and refunds. What is clear though, is that for brand new properties, you are certainly VAT exempt for the first 3 years. Purely residential properties also offer VAT exemptions for both buyers and renters. For commercial properties, there are few VAT exemptions as of now, but there are ways for owners and buyers to recover the VAT on property-related expenses.