VAT (Value Added Tax) was introduced in the United Arab Emirates (UAE) on the 1st of January, 2018 and was implemented for enabling the revenue diversification of the country. VAT has been kept at 5% which is comparatively lower in comparison to several other nations.
There is a major difference between commercial and residential real estate structures in the UAE for VAT applicability, i.e. commercial real estate units are regulated by separate clauses/rulings. What classifies any building as residential is that it should be fixed to the ground and designed for human occupation. This does not include serviced apartments, hotels and other similar categories.
Taxation and other vital details
Here is what comes under the taxable category:
- Any commercial property situated in the UAE, whether sold/leased out including retail buildings, offices and even car parking (unless it is part of a residential project/building).
- Non-resident owners and tenants are also subjected to VAT at 5% for commercial properties. If the tenant and landlord are both non-residents of the UAE, landlords are required to register for VAT if the property is situated in the country.
- Lease based incentives including free office fit-outs are also subjected to VAT.
- VAT also applies for rents that are payable under commercial rental contracts which were effective last year in relation to rents linked to 2018.
- Any property which is movable like mobile homes.
- Regular bed and breakfast, hotels and serviced apartments.
- Residential property that is leased out on short-term basis to non-residents. This will come under the commercial If the lease is lesser than 6 months and the person living does not possess any Emirates ID, it will be taken as commercial from the perspective of VAT.
What else should you know?
Commercial property in the UAE has been standard rated, i.e. it will attract 5% VAT while residential property is exempted from taxes. Anything tailored for accommodation like residences, accommodation for employees and students and even nursing homes are thus exempted from taxes. Zero-rated supply is another category that applies to the residential segment. First supply of residential realty within 3 years from completion will be zero-rated in the country along with first supply of charity-linked buildings and buildings converted to residential from commercial. This also applies for nationals in the UAE who are building their own homes.
Developers may now recover VAT linked to costs of development including material purchases, professional services and so on. Subsequent supplies of residential will however be exempted from VAT along with land without infrastructure. Developers offering both standard rated commercial and exempt residential properties will still register for VAT although there will be complications regarding calculation of where VAT can be recovered. Authorities can approve refund claims of developers within 20 days or ask for an extension of the timeframe. Post approval, refunds are granted within a period of 5 days. Landlords have to register if revenues (yearly) surpass Dh375,000. A little more than half of this amount means that you can voluntarily register for VAT.
Real estate agencies and Dewa fees are applicable under VAT while leasing/sales are both classified as taxable services/goods. This means that water and electricity bills will come with 5% VAT for tenants along with district cooling and similar services. Agency commissions will also have VAT added to them. This also applies for repairs, facility management and other real estate services. Lease/sale of property is exempted from VAT in the residential secondary market. DLD registration and Ejari rental contracts are not expected to come under the purview of VAT. For help with VAT registration and filing along with auditing, accounting and company incorporation, GCC Filings is your best bet by all means.