The UAE has started the implementation of value-added tax (VAT) at the rate of 5% with effect from January 1, 2018. In the first phase, businesses have started VAT registration on the website of the Federal Tax Authority (FTA). Below we will discuss the effects on the real estate sector after the implementation.
Supply and Real Estate relation
Supply of real estate includes sale, lease or giving the right in any case of real estate.
Find more detail - Common Mistakes made by SME for VAT filing in UAE
Residential building for VAT purposes
A residential building or a building that is meant to design for the living of individuals, or generally includes business buildings which can be occupied by any person for the residence purpose. It does not include:
- Any place which cannot be considered as building as it is not fixed to the ground and can be moved from one place to other without causing damage.
- Any structure which will be used as a hotel/ motel, banks, hospital etc.
- A furnished apartment or flat in which after-sales services are provided in addition to the supply of that product.
- Any building or structure constructed or modified without permission of the concerned lawful authority
Commercial building for VAT purposes
A building that does not have any residential building or portion of it, for example, warehouses, hotels, shopping centre etc.
VAT on Residential Building
After the construction of the new residential building the first supply within the span of three years of will be zero-rated. All relevant supplies will be exempted in the first three years.
Find more info - VAT on Residential Real Estate in the UAE
VAT Registration of Real Estate owner
In case of real estate owner does not involve in any other business activity then there is no need to register for the VAT. Owners those conduct other business activities they should gather the necessary information in this regard. Id the supplies made to customers in the last 12 months exceeds Dh 375,000 or expected to cross Dh 375,000 in the coming 30 days.
VAT Recovery by the owner of Real Estate
Owner of a residential building will not be eligible for the recovery in the relation of expenses related to the exempt supply of the housing purpose buildings. While the owner of a commercial building is eligible to apply for the VAT recovery in the relation of expenses related to the supply of the building.
VAT on mixed-use building (Residential and Commercial)
The rent or sale of a residential part of the building shall be treated as zero-rated or exempted, depending on the reason whether it is a first supply or a subsequent supply. However, the leasing or sale of a commercial part of the building shall be considered 5% VAT.
Read More: VAT on Commercial Real Estate in the UAE
VAT implementation of Renting a Property
VAT will not be implemented in a residential building. On the other hand rent of commercial building will be imposed on VAT at 5%.
As per Federal Tax Authority, there will be no VAT implementation on sale or lease of any real estate property. In specific zones, VAT will be exempted on both commercial and residential properties.
FTA declared 20 zones across the UAE particularly seven in Dubai; there will be three in Abu Dhabi and Ras Al Khaimah; two in Sharjah, Fujairah and Umm Al Quwain and one in Ajman.
FTA clarified in case if owners' associations are working independently from the developer or property management companies, VAT registration will be considered mandatory.
Most homeowners' associations are managed by the Real Estate Regulatory Authority.
Third parties are generally considered best for maintenance and charge tenants that’s the reason, services provided by homeowner’s associations are measured to be a taxable supply and are subject to the VAT rate.
It has been observed that if the individual is already VAT registered for income purpose in his personal capacity like commercial rents, and then he cannot use his own Tax Registration Number (TRN) for business-related purposes. Same is with business TRN cannot be used for personal purposes.
The branches of foreign companies which are not manufacturing taxable supplies in the UAE are eligible to claim for VAT refund that was paid on expenses they acquire in the UAE; however, it is subjected to the certain terms and conditions.
FTA observed that the tax payment can only be made through FTA through the e-dirham card - which has nominal charges per transaction - or via corporate debit and credit cards in that case banks will be charged up to a two per cent as a fee per transaction or more of the transaction value including VAT on the fee.
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