A five percent value-added tax (VAT) on property transactions is scheduled to be implemented starting January 2018 in the UAE. The VAT tax will affect big-ticket investors and commercial property owners while residential transactions and rentals are anticipated to be excluded from taxes. GCC countries have agreed to implement the VAT to diversify government revenue as oil prices are experiencing a steady decline. With Dubai’s real estate market attracting local and foreign investors, this article highlights which sectors will be impacted or exempted from the VAT charge.
VAT on Sale of Commercial / Residential Properties
The first sale of residential properties will be exempt in some jurisdictions. It is likely that the sale of commercial property in the UAE will include a VAT.
Leasing of Commercial / Residential Properties
The UAE Minister of Finance has recently announced that leasing of residential properties will not include a VAT. However, commercial leases will include a VAT charge. The VAT on commercial rentals will encourage landlords to increase the rental price on tenants. It is not clear if the hospitality industry will include a VAT charge though the consensus is that the hospitality sector will be consolidated as commercial property.
VAT on Business Revenue
Companies earning annual revenues over AED 3.75 million annually are required to pay VAT starting January 2018. Businesses that annually earn between AED 1.87 million and AED 3.75 million will have an advantage of deciding whether to register under the VAT system during phase 1. However, these businesses are required to register under the VAT system when phase 2 begins. The date of phase 2 has not been announced.
VAT on the Construction Industry
The most important topic within the construction sector is the implementation of VAT on previously agreed construction contracts. Construction contracts typically take several years for completions. Previously signed contracts might not have prepared for the implementation of VAT. The critical question is who bears the burden of VAT. The UAE Government might exempt previously signed contracts from the VAT charge.
VAT on Property Developers
The implementation of VAT will differ from the sale of developed commercial property, undeveloped property and residential property. Bare land is expected to be exempt from VAT regardless of its use. Real Estate developers should consider the challenge related to mixed developments involving commercial and residential leasing and the need to allocate VAT recovery. The responsibility to pay VAT is inevitable. Developers must restructure their businesses in a way to reduce the financial impact of the VAT charge.