IS VAT APPLICABLE ON COMMERCIAL PROPERTY?

INTRODUCTION

Since the real estate sector is one of the main contributors to the national economy and investment environment, the UAE tax system has been designed in such a way so that it supports the real estate sector in all its activities and also provides a suitable environment for its continued growth. Various provisions have been inserted in the Federal Decree Law No. 8 of 2017 on VAT and in the Executive Resolution (Cabinet Decision No.52 of 2017) in order to ensure continued competitiveness of this sector.

RESIDENTIAL BUILDINGS

Article 39 of the Executive Resolution states that first supply of residential buildings within 3 years of completion is subject to zero percent tax which means that the owners or investors are in a position to recover the tax from the expenses incurred on construction.

RENTING OF RESIDENTIAL BUILDINGS

Apartments, buildings, residential villa complexes, housing for workers and students, accommodation for armed forces and police, homes for the elderly, orphans and nursing homes are residential buildings which are not taxable if rented or sold. As per law, the period of lease is to be more than 6 months or to the holders of the identity card that has been issued by the Federal Authority for For Identity and Citizenship.  

ADVANTAGES GIVEN TO THE LANDLORD WHO RENT THEIR RESIDENTIAL BUILDINGS

If all the supplies which are made by the owner are exempt from tax, then the landlord who rent their properties for residential buildings are not required to register with the Federal Tax Authority. In addition to this, the owners can deduct from their VAT returns, the tax that has been paid on the facility management services of commercial buildings.

REAL ESTATE TRANSACTIONS RELATED TO RESIDENTIAL BUILDING

The real estate transactions that are related to residential buildings including sales, rents, leaseholds and long term leases are subject to zero rate and the owners benefits from this zero rate.   

CONVERSION OF COMMERCIAL BUILDING INTO RESIDENTIAL BUILDING

The buyer is entitled to recover the tax which is paid for buying a commercial building and converting it into residential building within 3 years from the date of transfer. This is also applicable on renting of residential property that has been built. In case of mixed use building, the residential part would be subject to exemption or zero rate as per the percentage of the building and the commercial part would be subject to tax.

 LEASED COMMERCIAL PROPERTY

When the leased commercial property is sold or disposed of by any transaction resulting in transfer of ownership to a taxable person which is registered for tax purposes, then it is not considered as supply for VAT purposes. The procedures that are required for renting or selling of commercial and industrial properties in the designated zones that are specified by the Cabinet’s decision are outside the scope of tax.

COMMERCIAL PROPERTY TRANSACTIONS

Since it is mandatory for a landlord of commercial property to issue tax invoice while billing the annual rent, both lease and purchase of commercial property are exempt from VAT. Both the tenant as well as purchasers have to pay VAT either on the rent or on the purchase price.

REQUIREMENT OF THE SELLER AND THE PURCHASER

• The seller and the purchaser are required to register for VAT. It is anyways mandatory for the seller to register for VAT when the annual rent exceeds the mandatory tax registration threshold of Dh 375,000 per year. Even to proceed with a sale transaction of commercial property, the seller and the purchaser are required to register for VAT.
• The purchaser would however be the party making the initial declaration on the FTA’s e-service portal and he would also be required to have seller’s tax registration number, the VAT amount, commercial property plot number, the date of sale and land department where the property is registered.
• Furthermore, the seller is also required to declare VAT on the purchase price as “output VAT” and the purchaser is also entitled to claim the same VAT as input VAT when they are rendering their periodic VAT returns. The tax returns for both the seller and the purchaser would be pre populated with the amount of VAT that is related to the commercial property sale as output VAT for the seller and input VAT for the purchaser.  

SALE OF COMMERCIAL PROPERTY

Since the sale of commercial property is considered as a taxable supply, the registration threshold applies with the sale price determining the threshold. It also applies to the purchaser, and the purchase price would be a vatable expense which warrants registration. Not only the companies are liable to register for VAT but the individuals who own or sell commercial property should also register in their individual capacity.

PROPERTIES WHICH ARE TAXABLE @5%

5% VAT is applicable on the sale of vacant commercial properties or on the off plan sale of commercial properties under the building license. However the tax which is paid during the lease period can be recovered through the tax return of the tenant if they are a taxable person who are registered for tax purposes and are entitled to tax refund. Tax which is paid towards the purchase of an entire building may be recovered as per the capital asset scheme if the cost of property exceeds Dh 5 million. The real estate related services that also include brokerage and real estate consultancy are subject to VAT on the value of service which is rendered at the location where the property is located as per the normal business rules on taxation.