The United Arab Emirates (UAE) introduced Value Added Tax (VAT) at a standard rate of 5% on January 1, 2018. VAT is an indirect tax applied to the consumption of goods and services in the UAE, collected by registered businesses and remitted to the Federal Tax Authority (FTA). One sector affected by VAT is the real estate industry. The supply of real estate properties in the UAE can be subject to VAT depending on factors like type, purpose, and timing of the supply. In this article, we will explain how VAT applies to the supply of commercial properties in the UAE.

What is UAE VAT Registration?

UAE VAT registration is the process of enrolling a business with the FTA to collect and pay VAT on behalf of the government. The standard VAT rate is 5% for most supplies, except for exempt and zero-rated supplies. Businesses may need to register for VAT based on their turnover and activities, falling into two types: mandatory and voluntary.

1. Mandatory Registration:

A business must register for VAT if its taxable supplies and imports in the last 12 months exceed AED 375,000, or if it expects them to exceed AED 375,000 in the next 30 days. This doesn't apply to foreign businesses making taxable supplies in the UAE.

2. Voluntary Registration:

A business may choose to register if it doesn't meet the mandatory criteria but its taxable supplies and imports or taxable expenses in the last 12 months exceed AED 187,500, or are expected to exceed AED 187,500 in the next 30 days.

What is a Commercial Property?

A commercial property is any building or part thereof that is not a residential building as defined by the FTA Commercial real estate is any land or buildings, that are not one of the following:

A building designed as a residential building or a number of residential buildings;
A building intended for use by a charity for a relevant charitable activity; or
Bare land.

Examples of commercial properties include offices, shops, hotels, warehouses, factories, and land used for commercial purposes.

How is VAT Applied to Commercial Real Estate?

The supply of commercial real estate, whether by sale or lease, is subject to the standard VAT rate of 5% in the UAE. The supplier must charge VAT on the total amount received for the supply, including any installments. The supplier can also recover any VAT paid on the costs related to the supply.

What happens if a Supply of Commercial Real Estate is cancelled?

If a supply of commercial real estate is canceled, for instance, if a planned development does not go ahead, the supplier must normally refund the customer any payments made for the supply. The supplier must also issue a tax credit note to the customer, which will cancel out the output tax that was previously reported.

However, if the supplier is allowed to keep the payments made by the customer, the supplier must determine the reason for this and the VAT treatment accordingly. If the payments are considered as compensation for a service provided by the supplier, they will still be subject to VAT at 5% and no tax credit note will be required.

VAT Special Payment Process for Sales of Commercial Real Estate in the UAE

The special payment process for VAT applies to certain transactions involving commercial real estate in the UAE. The special payment process applies only to commercial properties sold by a supplier other than the developer and is subject to 5% VAT. It does not apply to:

Sales or leases of residential properties;
Leases of commercial properties;
Sales of commercial properties by the developer; or
Sales of commercial properties with existing tenants to a buyer who is a taxable person and qualifies as a transfer of a business.
In these cases, the seller issues a tax invoice to the buyer for the property as normal. However, before completing the ownership transfer process with the Land Department, the buyer of the commercial property is required to pay the VAT due on the purchase directly to the FTA. Alternatively, subject to availability in the specific Emirate, the VAT may be paid via a bank nominated by the FTA for such purposes.
After paying the VAT to the FTA, the buyer will get a Payment Transaction Number or a proof of payment (if paid through a bank).
The buyer must show the Payment Transaction Number or proof of payment to the Land Department to complete the ownership transfer. Otherwise, the purchase will be delayed.
The seller will report the output tax on the property in their VAT return and adjust it to avoid double payment to the FTA.
For other types of property transactions, the normal VAT rules apply.

VAT on Lease of Commercial Real Estate

The lease of commercial real estate is subject to VAT at 5% in the UAE. The owner must register for VAT if the value of their supplies exceeds the mandatory registration threshold of AED 375,000. The owner can also recover VAT paid on expenses related to the commercial renting business.

How VAT Applies to Other Services Related to Commercial Real Estate in UAE

Other services related to commercial real estate that are subject to VAT at 5% in the UAE are:

Maintenance of buildings
Owners associations and other related services
Electricity, water, gas, cooling
Real-estate agent fees.

VAT on Commercial Building as a Capital Asset in UAE

Where a commercial building costing more than AED 5 million is purchased, it shall be treated as a capital asset.
The buyer will pay VAT at 5% to the seller and can recover VAT on their tax return related to the period of purchase. However, they will have to monitor the use of the building for 10 years.
If there is a change of use that affects their entitlement to recover VAT, they may need to adjust the VAT recovered accordingly.

VAT deregistration for commercial properties in UAE

VAT Deregistration is the process of canceling the VAT registration with the FTA in UAE.

1. A person or a business entity can apply for VAT Deregistration if :

Their taxable supplies or expenses are less than AED 187,500 in 12 months and will not exceed it in 30 days.
If the value of their Taxable Supplies during the past (12) months was less than the Mandatory Registration Threshold i.e. AED 375,000
They stop making taxable supplies or doing any business activity.

2. An application for VAT Deregistration must be submitted within 20 business days from the date of occurrence of the event that requires deregistration with the FTA under Article 21 of the VAT Law. In case of failure, penalties may be imposed.

3. An application for VAT Deregistration must be made through the FTA e-Services portal and accompanied by the relevant documents.

4. The FTA will approve or reject the application within 20 business days.

5. Any tax liabilities and tax returns must be settled and filed before applying for VAT Deregistration.

What are the obligations of commercial property owners and tenants?

Commercial property owners and tenants must comply with the following obligations under the UAE VAT law:

The owners of residential buildings are not required to register for VAT unless they have other taxable activities. The owners of non-residential buildings must register for VAT if their taxable supplies are more than AED 375,000 in 12 months or will exceed it in 30 days.
Keep accurate records and documents related to their business activities and transactions for at least five years.
File periodic tax returns and pay any tax due within the prescribed time limit.
Inform the FTA of any changes or errors in their tax registration or returns.

Seek Assistance of Farahat & Co. for VAT Registration

VAT Registration of commercial property in the UAE can be a complex and time-consuming process that requires a thorough understanding of the VAT laws and regulations. VAT Consultants at Farahat & Co. can help you with this process by providing the following services:

Assess your eligibility and liability for VAT registration and advise you on the best course of action.
Assist you with the online VAT registration process and ensure that you submit all the required documents and information to the FTA.
Help you maintain accurate and compliant records and documents related to your commercial property transactions and activities.
Assist you in filing tax returns.
Advise you on how to claim refunds or input tax credits for the VAT paid on your commercial property expenses.
Represent you in case of any disputes or inquiries from the FTA or other authorities.

By hiring VAT Consultants at Farahat & Co., you can save time, money, and hassle while ensuring compliance with the UAE VAT law for your commercial property.

Read More: VAT Registration for Commercial Use of Property Under Mandatory Threshold