Which real estate transactions are exempt from VAT?
- What is VAT?
- VAT on Real Estate Transactions
- VAT for Tenants
- VAT for Buyers
- Commercial Property VAT
- FAQs
In the UAE, Value-Added Tax (VAT) can affect the cost of buying or selling property. However, not all real estate transactions are subject to VAT, so it’s safe to say that it’s important to understand the VAT exemption in UAE real estate transactions. Whether you’re buying a home, renting a property, or involved in property development, understanding these exemptions will help you make informed decisions in the property market.
What is VAT in the UAE?
The UAE is mostly tax free but there are some considerations. The Value Added Tax (VAT) in the UAE is a tax applied to most goods and services, including property transactions.
Under the Federal Decree-Law No. (8) of 2017 on Value Added Tax, the Federal Tax Authority (FTA) categorised VAT into three segments:
- The 5% standard rate
- Exempt
- Zero-rated
VAT might be added to the price of the property. Hence, it’s essential to know how VAT on property in Dubai works, as it can affect the overall cost.
For example, some residential properties are exempt from VAT, while others, like commercial properties, are not. Knowing when VAT applies can help you plan your finances better when dealing with property transactions in Dubai.
RESIDENTIAL PROPERTY VAT ON REAL ESTATE TRANSACTIONS
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 to pay VAT on property in Dubai and other parts of the UAE for services such as maintenance or upkeep of the property, agency commission fees, owners association costs and any property management services that may be utilised.
Real Estate VAT in the UAE For Tenants
Once again, a tenant’s rent is one of the VAT exempt real estate transactions. However, a tenant can still expect to shell out VAT on services such as water, electricity, gas, air conditioning and agency fees.
Real Estate VAT in the UAE For Buyers
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.
Residential developments are also one of the VAT exempt real estate transactions for a limited time. In other words, there is no VAT on the property, for the first three years from completion. So, developers can recover the VAT they are charged on design, materials, construction and contracting as they form part of the developer’s business costs.
Commercial Property VAT in the UAE
As per the FTA, the following are classified as commercial properties in the UAE:
- Serviced residences
- Shops
- Offices
- Warehouses
- Buildings used for healthcare
- Schools and universities
- Short-term leases that are six months and shorter
For Property Owners
If someone owns any of the properties mentioned above, they are required to register for VAT as they may not have VAT exemption in UAE property transactions. 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.
For Buyers
The buyer of a commercial property will be able to recover this VAT, on their tax return. However, the buyer is responsible for keeping 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 as it no longer fulfils the criteria for VAT exemption for UAE real estate transactions.
When dealing with commercial property, the VAT will apply to both the primary and secondary markets.
FAQs
What are designated VAT exempted free zone?
The UAE Cabinet has defined some VAT exempt free zones in UAE. These are called the Designated Zones as the area outside the scope of VAT in the UAE. Not all Free Zones are categorised as Designated Zones, there are certain criteria to be met for designated free zones to obtain VAT exemption.
The VAT rules for Designated Free Zone are slightly complicated as there are a lot of case-to-case basis transactions across a company in a designated free zone with other companies in UAE and Overseas that may be VAT payable.
It is advisable to associate with an expert tax and VAT consultant in the UAE to be aware of the VAT rules and compliance procedures.
Is VAT applicable on real estate in the UAE?
Yes, VAT is applicable on some real estate transactions in the UAE while others are exempt.
Which supplies are subject to a zero VAT rate in the UAE?
Some UAE VAT exemptions on real estate transactions may fall under Zero-rated supplies. Under Federal Decree-Law No. (8) of 2017, the initial sale or lease of buildings converted from non-residential to residential use, as outlined in the Executive Regulation, qualifies as a taxable supply with a 0% VAT rate applied.
This means that while VAT is technically charged, it doesn’t increase the final price paid by the customer, as no VAT is added. However, businesses that provide zero-rated supplies can still reclaim the VAT they paid on expenses related to these supplies.
This concludes our roundup of VAT exemption for UAE real estate transactions. VAT is just one of the few taxes in the UAE. As per the rules for new developments, VAT exemption is 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. As per the law, those with taxable supplies and imports of over AED 187,500 per annum (and below AED 375k) can choose to register for VAT in the UAE.
