Value Added Tax (VAT), at the rate of 5%, was introduced in the UAE from 2018.
According to the Federal Tax Authority (FTA) and the Dubai Land Department (DLD), VAT should have only a negligible impact on the real estate in the UAE, since about 85% of the components in the real estate sector are not subject to the tax. Real estate transactions, except for the sale of vacant commercial properties and commercial property leases, are either not subject to or exempt from VAT.
Which Real Estate Does VAT Apply To?
VAT in the UAE would be levied on real estate as follows:
Taxable Items (@5%)
- Sale of greenfield commercial spaces
- Services pertaining to real estate, like property consulting, brokerage, etc.
- Residential buildings, if sold or rented out
- Any transaction pertaining to residential buildings
- Bare lands
- Selling of leased commercial spaces
This implies that a VAT of 5% is applicable on sale or lease of commercial properties only. Residential properties, in effect, are exempt from it (residential buying would be be zero-rated-taxable on the first sale but exempted on subsequent ones).
While the effect on residential real estate will be negligible, the retail and hotel sectors could be affected by the fallout. The real estate market in the UAE has slowed over the past two years, with further softening expected in sales and rental prices. Given this soft nature of the real estate market in the UAE, commercial land owners might struggle to pass the VAT charge on to the respective tenants, with the former probably having to end up absorbing some of the cost increment.
The retail sector is likely to witness a substantial negative backlash, as VAT might hinder future growth as a result of appending around 2% to consumer prices this year. This will likely thwart the development of any more retail schemes.
Trends in Real Estate in the UAE
During 2017, the value of bare land sales, residential properties, and occupied commercial and retail properties comprised the biggest fraction of total properties bought and sold. This ratio is expected to stay constant in the near future, or might even increase with commercial offices continuing to enhance their leasing operations and divest vacant units. In terms of rent, commercial properties accounted for over 31% of the real estate leased in Dubai.
A Word of Advice for Real Estate Developers
VAT might be an interesting aspect to be factored in by real estate developers in Dubai and the rest of the UAE. In the initial phases of project development, developers should have a robust cash flow system in place, which considers the VAT received from the properties’ buyers and that paid to their suppliers, which can eventually be refunded from the tax authority. Normally, the money involved can be quite large, and a simple cash flow management system, such as maintaining a separate bank account to send or receive VAT funds, could be adopted as a makeshift solution till a developer becomes VAT-registered.
In summary, the area where VAT is most likely to have an impact on, as far as real estate in the UAE is concerned, isn’t price but cash flow. Despite being another factor to consider when purchasing property in Dubai, VAT is not likely to contribute substantially in terms of piling additional costs to real estate transactions.
As a matter of fact, the introduction of VAT shall increase transparency, keeping in mind the stern audit prerequisites that will require real estate companies to update their processes to be compliant with the new regulations. This should provide an additional fillip for institutional investors worldwide to explore opportunities in the real estate sector in the UAE.
We at JAXA have been operating in the UAE for over a decade, helping firms with accounting and tax consulting. Our business advisors have studied the tax and real estate landscape in Dubai to help firms with their VAT filing and registration. If you are a property developer in Dubai or the rest of the UAE and have questions about how you should about VAT, do contact us – we’d be happy to assist!