Since the 1st of January 2018, UAE implemented VAT or Value Added Tax which amounts to five percent of prices of most products and services. In this article, we’ll highlight the local regulations related to VAT on real estate in order to help you identify all the repercussions that VAT has on the real estate market. Being a kind of indirect tax added on certain products and services, VAT also applies to physical property which may be supplied such as water, real estate, and any form of energy. UAE Law (no 8) of 2017 provides details and specifics on the treatment of VAT which is subject to the 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. What is noteworthy is the law which doesn’t provide a distinction on whether residential properties are supplied to business entities or natural persons.
Article 46 of UAE VAT law mentions all the transactions which are considered as exempt from VAT. 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.
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 all property developers that are selling properties for commercial use can offset that input tax that is paid on any building material consumed, including services from third parties such as architecture, consulting, and the like.
If the acquired commercial property’s value exceeds Dhs 5,000,000, then it qualifies as capital asset according to executive regulations. This leads to even distribution for input VAT for the term that’s considered as the useful lifetime of the asset which is ten years in the case of commercial properties.
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.
For a building that is used for both commercial and residential, the tax that is incurred by property developers or owners of a building will be apportioned where there’s exempt supply. Portions that are 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
- Accounting books which are related to the business (this includes payments, receipts, sales, purchases, expenditures, revenues,
- Additional records which the tax authority requests from a business
The time period for a business to maintain and hold any of the documents mentioned above is five years following the tax period’s end and for a tax period that is specified in UAE VAT law for all real estate documents.
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 has 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, which is best left to experts. 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.