VAT (Value Added Tax) system was introduced into the UAE on 1 January 2018, was put in place to support the diversification of the revenue streams of the United Arab Emirates. The 5 percent capped – relatively low tax rate compared to other nations – VAT application in the real-estate market was far from a universal approach. This post will examine how VAT has affected the residential real estate market by evaluating essential words and scenarios you need to know about while researching investing prospects in the UAE.

The fundamentals

When it comes to the foundations of VAT and immovable assets, it is vital to grasp the difference between residential and commercial properties – the primary point is that separate rulings and provisions control commercial properties. The classification of a property as a residential property consists of being attached to the ground (i.e., not a motor home) and built for the occupation of people – hotels, serviced flats, and the like being excluded.

There are also two essential VAT-related conditions with which everyone in this market should become informed before considering to invest: zero-rated and exempt. If anything is called exempt, then VAT is not a factor. If zero is emphasized, this suggests that VAT can be charged and collected.

Supply

There are two basic ways in how VAT relates to real estate in Dubai – through the supply of products and services.

Goods are supplied about the transfer of ownership of or right to use of a property between two parties – sales and tenancy contracts included. There are different instances in which a party has to register charge and account for the VAT in respect of the delivery of goods:

• Investors have an annual income above Dhs 375,000.
• Property owners are not residing in the UAE. Furthermore, the reverse charge method cannot be used by non-resident properties even if their landlord is registered with VAT. This is because only imported goods and services are eligible for this approach.
• Residential property owners with other business and investment activities in Dubai.

A service supply relates to any service outside the scope of the product’s collection. The paragraph which outlines how the supply of services includes agency and conveyance charges and work on the planning, coordination, construction, conversion, maintenance, and demolition of a property is of vital interest to homeowners and investors. The VAT status of these services relies on when the items are delivered — this time is specified by two time periods.

First period: first supply

The initial supply covers any transaction or service within three years of the completion date of residential construction. This anniversary is noted as the day on which an impartial body has certified a building to be completed; the revised time for relocation is used to mark the start of the first supply step if a homeowner or renter is in occupancy before the scheduled completion date.

The first supply is zero-rated for VAT purposes and should therefore be utterly recoverable about VAT charges incurred in this stage, including sales and leases. Once the three-year limit expires, the supply of property-related services and goods will enter a new designation period.

Second Period: Subsequent Supplies

Any delivery of commodities, including the transfer of property or right of use, after the first supply is considered a subsequent supply. These supplies are VAT-free. It is vital to note that this exemption status applies to both transfers within and outside the first supply period. Therefore, if an asset changes hands once in the first supply and again in the succeeding supply, the exchange remains exempt from VAT.

Certain services are considered exempted from VAT status, meaning that the expenditures incurred cannot be reimbursed. In such cases, property developers and goods charge owners and tenants for a service – the services range from the agency and the transportation fees for building up to the acquisition of properties through the community administration and maintenance of communal areas. These charges are subject to the usual 5% VAT rate.

Mixed-use and off-plan properties

All residential units that have been purchased off-plan (such as any property purchased straight from a developer before building or completing a team) are zero-rated for tax purposes. This is because off-plan property transfers are considered to be future goods supplies. The same applies to neighborhoods and buildings of mixed-use. For example, suppose a tower is multi-use with residential and commercial zones. In that case, the VAT status governing such property categories is applied on a typical level – such that a residential property within a multi-use building is zero.