Value Added Tax (VAT) on Real Estate Industry in the UAE
The Value Added Tax (VAT) came into effect in the UAE from 1 January 2018 but a time span of 2 years is still too early to assess the impact of VAT on the real estate industry. To better understand how VAT applies to the real estate sector, it is imperative to follow how the Federal Tax Authority (FTA) rates the taxable and non-taxable supplies in the sector. The VAT Law rates the supplies in the Real Estate sector as
- Standard Rated
The FTA generally rates residential properties and bare land as exempt from VAT and the commercial properties come under the standard VAT rate of 5%.
VAT on Commercial Properties in the UAE
The Federal Tax Authority (FTA) mandates that any commercial property, be it leased out or sold, is subject to VAT at the standard 5% rate. This means that properties used for office and retail purposes will come under the standard VAT rate. Even the car parking lot will be taxable unless it is part of residential property.
Still, confused about what is taxable under the commercial real estate category? Read the following list:
- Non-resident owners/ tenants
- Lease Incentives
- Properties that are not fixed to the ground (Mobile Homes)
- Buildings used as Hotels, Motels, Bed & Breakfast entities
- Serviced Apartments
The FTA considers any building as commercial property if it is not:
- Built for residential purposes
- Built to be used by a charity or for charitable activity
- Bare land
Special Case on VAT on Sales of Commercial Real Estate in the UAE
The FTA has defined a special payment process for VAT on sales of commercial reals estates. This process is applicable if the commercial property in the UAE is sold by any supplier other than the developer of the property and this would come under the standard 5% VAT.
VAT on Residential Real Estate
How the FTA Defines Residential properties?
The FTA defines residential properties as any building that is intended for human occupation. The following are the broader types of entities that come under the FTA’s definition of residential properties for the VAT purpose:
- Buildings or part of the building is occupied or to be occupied by a person as the residence
- Buildings used as residential accommodation for students
- Nursing Homes and resting homes
- Farm Houses on agriculture land
If the occupants use a small portion of the building as an office or workspace, the FTA still considers it as a residential building for VAT purposes. As more people are nowadays working remotely in an office or workspace inside their apartments, this information is vital. However, it’s better to consult the best VAT consultancy services in the UAE to avoid any confusion in this regard.
VAT on Residential Properties: The First Supply of the Building
The VAT on Residential buildings is defined in terms of supply of services and goods. According to the FTA, the first supply of residential building is zero-rated for VAT purposes. It simply means that if the first sale or lease of the building happens within 3 years after its construction, the FTA will treat it as zero-rated. Further, the VAT incurred on the costs associated with the first supply of the residential building is eligible for a full recovery. The FTA has exempted all the subsequent supplies of the building from the VAT.
VAT on Service Charges Related to Residential Buildings
It is common for the owners’ association of a residential building in the UAE to charge owners or tenants for community management or the maintenance of communal areas within the apartments. Such service charges are subject to the standard VAT rate. VAT consultants in the UAE recommend that residential property developers need to have a proper understanding of the services that come under the standard VAT rate. Property developers need to hire the services of a reputed UAE-based VAT consultancy firm.
VAT on Bare Land
The FTA has exempted the supply of bare land from VAT. Bare land in simple language means a vacant land. However, FTA mandates a bare land should not be covered by
- Completed buildings
- Partially completed buildings
- Civil engineering works
Why Choose VAT Services of Jitendra Chartered Accountants?
Jitendra Chartered Accountants (JCA) is a well-known VAT consultancy firm in the UAE with immense experience in helping out hundreds of real estate businesses with VAT/TAX-related obligations and requirements. JCA’s team of efficient VAT consultants would assist the builders in the UAE real estate industry in VAT Planning, VAT Compliance, VAT Registration, and VAT Advisory Services.