Introduced to the UAE on January 1st 2018, VAT (Value Added Tax) was put in place to encourage the diversification of the United Arab Emirates’ revenue streams. Capped at 5% - a relatively low tax rate when compared to other countries – VAT implementation has been far from a blanket measure in the real-estate industry. In this article, we will look at how the residential real estate market has been affected by VAT by examining key terms and scenarios that you need to be aware of when exploring investment opportunities in the UAE.
The Basics
When it comes to the basics of VAT and real estate it’s important to understand the difference between residential and commercial real-estate properties – the main point being that commercial units are governed by separate rulings and clauses. What classifies a piece of real estate as residential is that it must be fixed to the ground (i.e. not a motor home) and be designed for human occupation – this excludes hotels, serviced apartments and similar services.
There are also two key VAT-related statuses anyone dealing in this market should familiarise themselves with before looking to invest: zero-rated and exempt. When something is referred to as exempt, it means that VAT isn’t a factor. If zero-rated is highlighted, this indicates that VAT can be charged for and recovered.
The Supplies
As for how VAT applies to real estate in Dubai, there are two primary ways - through the supply of goods and via the supply of services.
A supply of goods concerns the transfer of ownership or the right to use of a property between two parties - this includes sales and tenancy contracts. There are various situations related to the supply of goods in which a party needs to register, charge and account for VAT:
• Investors with a yearly revenue of over Dhs 375,000.
• Landlords not resident in the UAE. Additionally, non-resident landlords cannot implement the reverse charge mechanism, even if their tenant is VAT-registered. This is because this mechanism can only be applied to imported goods and services.
• Owners of residential properties who have other business activities and investments in Dubai.
(There is no requirement for anyone who doesn’t fall under these three categories to register for VAT.)
A supply of services relates to any service outside the scope of the supply of goods. Of primary relevance for homeowners and investors is the clause that highlights how supply of services include agency and conveyancing fees and work related to the preparation, co-ordination, construction, conversion, maintenance and destruction of a property. The VAT status of these services depends on when the supply of goods takes place – that moment is defined by two periods of time.
Period One: The First Supply
The first supply relates to any transaction or service that takes place within three years of a residential building’s completion date. This anniversary is marked as the date an independent body certifies a building as finalised; if a homeowner or tenant occupies the unit before the scheduled completion date, the revised move-in time will be used to mark the start of the first-supply phase.
The first supply is zero-rated for VAT purposes, meaning any VAT incurred on costs related to this stage should be fully recoverable – this includes sales and leases. Once the three-year boundary expires, the supply of services and goods related to the property move into a new designation period…
Period Two: Subsequent Supplies
Any supply of goods , which includes the transfer of ownership or right of use, that happens after the first supply is deemed to be a subsequent supply. These supplies are exempt from VAT. It’s important to note that this exemption status pertains to transfers that occur both inside and outside of the first-supply period – so if a property changes hands once in the first supply and again in the subsequent supply, the exchange is still exempt from VAT.
Certain supply of services are deemed exempt from VAT status, which mean costs incurred cannot be reclaimed. In these instances, property developers and supplies charge owners and tenants in return for a service – these services range from agency and conveyancing fees in the build-up to a property purchase through to community management and maintenance of communal areas. These levies are subject to VAT at the standard rate of 5%.
Off-Plan and Mixed-Use Properties
All residential units bought off-plan (defined as any property purchased directly from a developer prior to a unit’s construction or completion) are zero-rated for tax purposes. This is because off-plan property exchanges are treated as future supplies of goods. The same status applies to mixed-use neighbourhoods and buildings. For instance, if a tower is multi-purpose with residential and commercial zones, the VAT statuses that govern these property types on a normal basis are applied – so a residential property inside a mixed-use building will be zero-rated.
To learn more about the agency and conveyancing services offered by Dubai Properties, or to speak to one of our experts about purchasing a property, contact us today.