Since the 1st of January 2018, UAE implemented VAT or Value Added Tax which amounts to five percent of the prices of most products and services. Here we discuss the local vat on real estate to identify the VAT repercussions on the real estate market. Like an indirect tax on certain products, VAT also applies to water, real estate, and any form of energy. UAE Law (no 8) of 2017 specify about the VAT treatment on usage and type of property among others.
VAT on Residential Properties in UAE
Article 45 of VAT law enlists all the items which are subject to zero VAT rate and this includes all residential buildings three years of its completion. This also applies to properties that were converted into residential buildings instead of commercials. The law doesn’t provide a distinction on whether residential properties are supplied to business entities or residents.
Article 46 of UAE VAT law mentions all the VAT exempt transactions. Exempt supplies, in the context of real estate, include bare land and supplies of buildings for residential use through leasing or sale that don’t qualify for zero VAT rate as stipulated in Article 45 related to zero VAT rate.
Do Homeowners Need to Undergo VAT Registration?
Residential property owners need not register for Vat in UAE unless their business activities within the country are taxable. Dubai VAT works the same as other countries where individuals need not pay tax unless they are business owners.
Should There be a Cause for Worry for Investors and Buyers of Dubai Real Estate?
The only issue of VAT in UAE is about pertaining to cash flow. The VAT in UAE won’t be having a negative effect on the value of real estate properties. However, VAT will become a factor in considering buying property as well as with accounting matters. Regulated tax agents in UAE can solve all your VAT-related issues.
VAT on Commercial Properties in UAE
The supply of properties for commercial use, as well as the proceeds from lease of commercial spaces, fall under VAT tax scope. This means that all the property developers selling commercial properties can offset the input tax paid on consumed building materials.
If the acquired commercial property’s value exceeds Dhs 5,000,000, then it qualifies as capital asset according to executive regulations.
From the perspective of the investor, the treatment implies an increased capital lock up in comparison to other jurisdictions wherein a total input VAT may be reclaimed with the financial year of the property’s purchase. But, full recovery for the VAT amount that was initially incurred is foreseen through the ongoing input tax offsetting e.g. maintenance related and output VAT e.g. from property leases throughout the term of usage of a property.
The tax incurred by the property developers or owners of the building will be apportioned if there’s an exempt supply. Portions related to taxable supplies may be recovered.
Documents Required for VAT
Businesses that are in construction, property sale/lease, and/or property development are required by UAE VAT law and the tax authority, Federal Tax Authority UAE, to keep records in which the authority is able to identify specifics of business/economic activities, as well as review all transactions.
Documents which have to be maintained by businesses in the real estate industry are as follows:
- Record and statements of inventory, including the values and their quantities, by the end of a relevant tax period
- Records of stock counts which are in relation to statements of inventory
- Wage or salaries of employees
- Fixed assets records
- Balance sheet
- Profit and loss statements
- Business accounting books (this includes payments, receipts, sales, purchases, expenditures, revenues)
- Additional records which the tax authority requests from a business
The time period for a business holds any of the above documents is five years after the tax period.
Conditions for Business to get VAT Refunds in UAE
VAT on business expenses may be deducted or refunded to a business if the following conditions are met:
- The business is a taxable person and the end consumer can’t claim input tax that is refunded
- VAT is charged correctly
- The business has proper documents and records that show VAT was paid
- Products or services which are intended to be utilized for making any taxable supply or have already been used by the business
Take note: Refund of input tax may only be reclaimed if the amount was paid upon making the supply or there is the intention for payment prior to the six months expiration following the payment of supply’s agreed date.
Taxation has always been a complicated matter. In order for you to ensure that you are aware of everything that is related to VAT on real estate, we suggest you speak with our regulated tax agents here in VAT Registration UAE.