Landlords and real estate professionals must be familiar with the UAE VAT legislation concerning both commercial and residential properties. Since its implementation in 2018, Value Added Tax (VAT) has significantly impacted various sectors, including real estate. Transactions involving commercial and residential properties in Dubai and across the UAE are subject to VAT. The Federal Tax Authority (FTA) is the governing body overseeing tax matters in the country, offering online services through their website: www.tax.gov.ae. It is essential for stakeholders in the real estate industry to stay informed and compliant with VAT regulations to navigate the legal landscape effectively.
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What Exactly Are Real-Estate-Related Services?
Real estate-related services encompass a broad range of activities crucial to the UAE’s economic diversification. According to the Federal Tax Authority (FTA), commercial buildings are defined as properties excluding bare land, those designated for residential or charitable purposes.
The good news is that while some real estate transactions are exempt from VAT, others are subject to either a 0% or 5% tax rate. This means that registration may be required in certain situations but not in others.
With a 5% VAT rate, significantly lower than rates in other countries, the introduction of VAT, especially in property transactions within Dubai, is unlikely to significantly affect the interests of buyers.
Rates Of VAT In The Real Estate Sector
In the real estate sector, VAT rates vary depending on the type of property. According to the VAT Law, residential homes and bare land are exempt from VAT. However, commercial property is subject to the standard VAT rate of 5%.
UAE VAT And Residential Real EstateÂ
A residential building is defined as a structure or portion thereof specifically intended and designed for individual habitation, typically serving as the primary residence for occupants. However, it does not encompass:
- Any movable structure not affixed to the ground, capable of relocation without damage.
- Buildings utilized as hotels, motels, bed and breakfast establishments, hospitals, or similar accommodations.
- Serviced apartments offering additional amenities beyond basic accommodation.
- Buildings constructed or converted without proper legal authorization.
UAE VAT On Commercial PropertyÂ
As per the FTA, any structure not utilized for philanthropic purposes or comprising bare land intended for residential development is classified as commercial property. VAT applies to buyers of commercial property in the UAE, including both secondary and off-plan market units. Commercial buildings purchased for leasing to enterprises or commercial tenants are subject to VAT, with owners being exempt. Examples would be choices, warehouses, hotels, shops, etc
VAT ON RESIDENTIAL PROPERTY
VAT on residential property is determined by the FTA, which defines residential premises as any building intended for human occupancy. Included in this definition are buildings utilized or intended for dwelling purposes by individuals, student residences, orphanages, rest homes, nursing homes, and farmhouses on agricultural property. Additionally, for VAT purposes, even a small portion of a building used as an office or workspace may be considered a residential structure.
Is a residential building subject to VAT?
The first supply of a new residential building within the first three years of it being constructed shall be zero-rated. All subsequent supplies shall be exempt, even if within the first three years.
Do Homeowners Have To Register For VAT?
As of now, there is no requirement for homeowners of residential real estate in the UAE to register for VAT. Similar to individuals in other countries, private persons in Dubai are not obligated to pay tax if they are business owners or self-employed and do not generate taxable income.
Does the owner of real estate have to register for VAT?
The owners of residential buildings do not have to register for VAT if they do not have any other business activities. Where owners have other business activities, they should consider their obligations further.
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 Dh375,000 or it is expected that they will exceed Dh375,000 over the coming 30 days.
Can a real estate owner recover VAT paid in relation to real estate?
An owner of residential building will not be able to recover VAT in respect of expenses related to the exempt supply of the residential buildings. An owner of a commercial building will generally be able to recover VAT in respect of expenses related to the supply of the building.
How is a mixed-use building (residential and commercial) treated for VAT?
The rent or sale of a residential part of the building shall be treated as zero-rated or exempt, depending on whether this is a first supply or a subsequent supply. The rent or sale of a commercial part of the building shall be treated as subject to VAT at 5%.
The tax incurred by the owner on the building needs to be apportioned where there is an exempt supply, and the portion related to the taxable supply (at 0% and 5%) may be recovered.
Will VAT be charged on the property I am renting?
The rent of residential building will generally be exempt from VAT. The rent of commercial building will be subject to VAT at 5%.
