VAT on Residential Property in UAE : A Complete Guide

• As the UAE implemented Value-Added Tax (VAT) in 2018, the majority of the population thought that it was a straightforward 5 percent tax on products and services.
• Yet the influence of the tax is far stretching even above the supermarket shelf.
• Specifically, the debate on the topic of the VAT on residential property in UAE among homeowners, investors, and real-estate developers.
• The knowledge of how the said tax works, who it applies to, and how it would impact your wallet can be what makes the difference between a seamless transaction and an unwanted surprise.

The importance of VAT on Residential Property.

• Think of when you are purchasing a penthouse in Dubai that is new, or renting a villa in Abu Dhabi.
• You will keep hearing one word, which is vat, and you are thinking whether it is a one-time payment or a recurring cost that will hit your purse.
• The fact is that the residential property in UAE may be affected by the VAT due to:
• Purchase price: Developers include VAT into the listing price.
• Rental income: This will require the landlords to collect and pay VAT on some leases.
• Future resale: Buyers are required to pay VAT in the moment of purchase and not in the moment of resale.
• Since the tax is charged to consumers (the buyer incurs it, yet, the seller receives it), it may be a hidden fee to buyers and an extra administrative expense to sellers.

Who does VAT on Residential Property in UAE Impact?

• Huge point to consider: When purchasing a new apartment or a villa in UAE, you virtually can not avoid the VAT on residential property in UAE.
• In the case of renting, the majority of leases are VAT-exempt.

The UAE residential property market has been undergoing significant changes in terms of VAT.

When VAT Applies

• New properties that are built recently: VAT is calculated on the price of sale and it is paid on the developer.
• Second hand sale: Generally exempted except when the sale is considered as part of a taxable supply (e.g. a developer reselling his unit).
• Leasing furnished homes: In most cases, it is not taxed; VAT only applies to the lease when the lease is regarded by the law as a service.

Exemptions & Thresholds

• Exempt: Pre-existing mortgages, resale of second hand units, rentals of ordinary residential leases.
• Threshold: the threshold of turnover under the UAE VAT law is AED 375,000. Unless the turnover of a developer is lower than this each year, he/she can choose not to register as a VAT vendor, however this is not common with high-value projects.

How to Calculate and Pay

• Calculation 5 per cent. of the selling price (excluding any down-payment).
• Payment: Developers also receive VAT upon sale and pass it over to the Federal Tax Authority (FTA) within one month.
• Pro Tip: Use this when negotiating with the developers whether the VAT will be added on the top of the price or it will be part of the price itself. Other developers offer a price that is inclusive of VAT so that there are no surprises.

Real-World Examples

• In the first instance, one can consider the process of purchasing a new flat.
• Situation: You are buying an apartment in one of the towers in Dubai Marina with 2 bedrooms and the price is AED 1,200,000.
• VAT amount: AED 60,000 (5 % of AED 1,200,000).
• Total cost: AED 1,260,000.
• What you will see is the final invoice will show the base price, VAT and the total sum.
• The second example is Renting Out a Property.
• Scenario: You have a luxury villa, and you are willing to lease it to a corporate guest on a short-term basis.
• VAT applicability: It is a short-term furnished lease, so, the VAT can be used.
• VAT amount: 5 % of the rental fee. Assuming the rent is AED 30,000 in 30 days, VAT will be AED 1,500.
• You are in charge: To gather VAT on behalf of the tenant and send it to him.
• These situations explain how VAT may be an aspect at the point of purchase and the tenancy stage.

Avoiding Common Pitfalls

• Do not always assume it is inclusive of VAT: Some of the developers will give a price that is VAT-exclusive.

• Check the condition of the property: Second hand or older units are usually waived but he/she should check through title deed.

• Look through the lease arrangements: a so-called standard lease may be considered a so-called service lease and taxed with VAT.

• Maintain proper records: In the case of landlords, correct invoicing is the key to compliance with VAT.

• Registration is an aspect to be noticed: VAT can impose fines on those not registered, especially in case of developer.

• In UAE, VAT registration of residential property is done as follows.

1. Figure out your turnover: When you are a developer or a property management company figure out your annual turnover that is subject to tax.

2. Application online: Use the e-service portal of FTA to submit your application.

3. Collect VAT: When approved, all sale or lease contracts that have to contain VAT must do so.

4. File returns: VAT returns should be filed quarterly and the amount of tax due should be paid before the deadlines.

Did you know? At the same time, even when your turnover is less than the registration threshold, you can choose to be registered under VAT; thus, making transactions with bigger developers who transact only with VAT-registered parties easier.

Frequently Asked Questions

Overall, does VAT on Residential Property in the UAE Warrant the Headache?

• The short answer: Yes and no.
• The cost of VAT is a non-recurring price factor to a majority of the consumers who are purchasing new-build residential units.
• On the part of landlords, the situation is more straightforward: in case you rent a high-end house, you may be required to impose VAT on the rent.
• To developers, it is a must-do in terms of VAT compliance.
• The thing is to be aware of it.
• Careful questioning of contracts, keeping abreast of FTA regulations and avoiding surprises on the VAT on residential property in UAE can be done with the right questions in mind.

You are willing to make your next property move?

• It can save you time, money and trouble whether you are purchasing your dream house, renting on a property or maintaining a portfolio, because the VAT system can be difficult to understand.
• In case you are unclear as to whether your next deal will be taxable or not or you just want to understand the fine-print, call a local tax consultant or real-estate professional today.
• They are able to take you through the ins and outs of the road so that you make your purchase/lease without difficulty.
• Make the first step- get a free VAT audit of your next property transfer and be on top of the curve.