HAS VAT BEEN FAIR WITH THE REALTY SECTOR ?

HAS VAT BEEN FAIR WITH THE REALTY SECTOR ?

INTRODUCTION

The general consumption tax i.e. VAT which applies to majority of transactions of Goods and Service has been implemented in the UAE at the rate of 5 % on 1st January 2018. It has been established by the Federal Tax Authority (FTA) and Dubai Land Department (DLD) that the VAT has a minimal impact on the real estate sector.

SUPPLY OF RESIDENTIAL BUILDING AND COMMERCIAL BUILDINGS

The law stipulates that the first supply of residential building within three years of completion shall be zero rated, which means that owners or investors will be able to recover tax  incurred on the expenses of construction. All the subsequent supplies will be exempt even if within the first three years i.e. the buyer will be exempted from VAT if he wants to sell it later.

All supplies of commercial properties are subject to standard rate of 5% including all construction or part thereof that are not residential erections and business owners will be able to recover input tax credit in their VAT returns.

REGISTRATION FOR VAT PURPOSES

Properties which are being rented by the landholders for residential purposes are not required to register with FTA. But, the owner of any building that is not residential will have to register if the value of the supplies over the preceding 12 months exceeds AED375, 000 in value, or if it is expected that they will exceed AED375, 000 over the coming 30 days. In addition, the tax paid on facility management services of commercial building can be withheld by the owners on their VAT returns.

MIXED-USE BUILDINGS

In the case of mixed use buildings, the residential part is subject to exemption or zero-rate according to its percentage of the building, while the commercial part is subject to tax.

The law stipulates that in case of buying a commercial building and converting it into a residential building, the buyer is entitled to recover the tax paid within a period of three years from the date of transfer. The same rule applies if the customer rents a residential property that has been built.

Please note that leased commercial properties are not considered as a supply for the purposes of VAT when sold or disposed of by any transaction resulting in the transfer of ownership to a taxable person registered for tax purposes. The procedures for renting or selling commercial and industrial properties in the designated zones specified by the decision of the cabinet are outside the scope of tax.

VAT RETRIEVAL

An owner of commercial construction will be able to retrieve VAT on expensed related to the supply of building but an owner of a residential building would not be able to do so as the supply is exempt supply.

The laws permit to recover the input on purchase of any single expenditure above AED5, 000,000 for building according to the capital asset scheme.

Impact on properties

VAT

Sale of vacant commercial property or

Off-plan sale of commercial properties  under building license

5%

Real-estate services including brokerage, management & consultancy

5%

Land(not bare land)

5%

Sale or rent of residential building after first supply

exempt

First sale of charitable building

0%

First Sale or Rent of residential building after completion of construction or conversion

0%

UAE Citizens building own home

5%(recoverable)

CONCLUSION

The UAE VAT Law has been designed in such way that it could support all the undertakings conducted under the realty sector. Therefore, it’s a negative, but not a big negative,” as the five percent rate is relatively low compared to international standards and will be beneficial for the country’s revenue in the long run.

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