The Federal Tax Authority (FTA) and Dubai Land Department (DLD) have released a statement to confirm that the UAE’s recently introduced VAT will have a limited impact on the real estate sector. They have also stipulated the cases where it is applicable.
FTA and DLD said that all real estate transactions, with the exception of the sale of vacant commercial properties and commercial property leases, will be either not subject to or exempt from the 5% VAT, while leased commercial property will not be considered a supply during their sale by the taxable person and will therefore not be taxable.
His Excellency Khalid Ali Al Bustani, director general of the FTA, stressed in the statement that the UAE tax system has been “designed to support the real estate sector in all its activities and provide a suitable environment” for its continued growth and development as one of the main contributors to the national economy and investment environment.
“The Federal Decree-Law No. 8 of 2017 on VAT and its Executive Regulation provide several mechanisms to ensure the continued competitiveness of the real estate sector,” he said. “For example, the law stipulates that the first supply of residential buildings within three years of completion is subject to the zero percent tax rate, which means that owners or investors can recover the tax related to the expenses incurred on construction. Residential buildings will be exempted from tax after first supply. Landlords who rent their properties for residential purposes are not required to register with FTA, if all supplies made by the owner are exempt from tax. In addition, the tax paid on facility management services of commercial buildings can be deducted by the owners on their VAT returns.”
His Excellency Sultan Butti bin Mejren, director general of DLD, added: “85% of components in Dubai’s total real estate sector are not subject to the 5% VAT. When reviewing the details of sales, rents and other transactions, we found that the value of bare land sales, residential properties, and occupied commercial and retail properties comprise the largest percentage of total properties traded during 2017.
“This ratio is expected to remain over the coming years and even stands to increase with commercial offices continuing to improve their leasing operations and minimise empty units. In terms of rents, commercial real estate accounted for 31% of the properties leased in the Dubai real estate market, or AED21 billion out of AED66 billion registered rents. As for the real estate businesses, it will be possible to recover taxes paid via the tax system.”
While the sale of vacant commercial properties or the off-plan sale of commercial properties under the building license, are subject to a 5% VAT, the tax paid during the lease period can be recovered through the tax return of the tenant if they are a taxable person registered for tax purposes and entitled to tax refund. Tax paid towards the purchase of an entire building may be recovered according to the capital asset scheme, if the cost of the property exceeds AED5 million.