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UAE Property VAT means for the Real Estate Industry?

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How UAE Property VAT law will impact property sales in the UAE?

Vat transactions is expected to impact only large-scale investors and those buying and renting commercial properties in the UAE. Meanwhile, residential deals, including rentals, will remain tax exempt from UAE property vat, and therefore should not be affected.

All residential housing, both for first-time buying and for buy-to-rent, will be subject to VAT at zero percent.

What is VAT?

VAT is an indirect tax applied upon the consumption of most goods and services. VAT is charged by VAT-registered businesses which make supplies of goods and services in the course of business. The VAT system is invoice-based. Each seller in the product chain includes a VAT charge on the buyer’s invoice. Under a VAT system, all sellers collect the tax and then pay it to the government, while they may also receive a refund from the government on tax that they have paid to suppliers. VAT is ultimately incurred and paid by the end consumer. VAT-registered businesses can also reclaim VAT incurred on goods and services acquired for business purposes (subject to some restrictions) such as the purchase of raw materials and other consumables. Every business which is VAT-registered (or required to be VAT-registered) must record, assess and report its VAT obligations and entitlements to the tax authorities, in accordance with the law.

Is there any Impact on Residential Renters?

Residential renters will escape taxation because residential leases are exempt from the VAT, and therefore they would not be allowed to add VAT to rent. But landlords may lose out on other expenses they incur with VAT, making rental prices vulnerable to an uptick.

How will the Developers and Large Scale Investors be effected?

From a Developer’s standpoint, UAE Property VAT will certainly impact the price of construction contracts as goods and services related to construction are taxable.

Since Dubai developers have been ramping up launches of their off-plan projects in the last six months, it’s imperative that they lock down processes so they are prepared under the new tax system.

As the sale and purchase of newly constructed real estate are likely to be zero-rated (that is, reported on a tax return but taxed at a zero percent rate), investors in residential property will not be required to pay VAT to the developer or a subsequent seller.

However, investors are likely to have to pay VAT to providers of leasing or management services relating to the property and will not be entitled to recover this VAT. Therefore, large-scale investors and developers are likely to feel a pinch. In addition Developers’ documentation should be sure to clarify that VAT will be payable by Investors otherwise they’ll be on the hook.

The initial, first sale of new homes will be taxed at a rate of zero percent. This means property developers will be able to claim back any VAT they had to pay from the government.

How about Commercial Property?

Sales of commercial property will be subject to UAE Property VAT at the standard rate of five percent, this will not be a material issue as they will be able to offset this VAT against VAT that they are collecting on their supplies. Also, In addition, commercial developers and property buyers may want to consider the one-off costs of setting up their system as a taxpayer. This may include new software and staff training to ensure compliance and reduce the risk of penalties from a VAT audit.

Commercial tenants – those in offices, shops, etc – can expect to pay VAT at the standard rate of five percent.

The Vision behind VAT?

According to Sultan bin Saeed Al Mansouri, UAE Minister of Economy,UAE Property VAT is expected to generate Dh12 billion in its first year and Dh20 billion in its second year. This may be reinvested in domestic infrastructure projects and welfare, that draw more people to the UAE and attracts more end users to the real estate market, thus making the industry even stronger and indemand.

This article was originally published in Khaleej Times