VAT stands for Value Added Tax, which is a type of indirect tax that is imposed on the consumption of goods and services. VAT is collected by businesses on behalf of the government and is paid by the end consumers. VAT was introduced in the UAE on January 1, 2018, at a standard rate of 5%. VAT is applied to most sectors of the economy, including real estate. However, not all real estate transactions are subject to VAT. Depending on the type and purpose of the property, VAT may or may not be charged on rent.

Types of Properties in UAE

The UAE VAT Law and the Federal Tax Authority (FTA) have defined and classified different types of properties for VAT purposes. The main categories are:

Commercial properties: These are properties that are used for business purposes, such as offices, shops, warehouses, hotels, etc. Commercial properties are subject to VAT at the standard rate of 5%, regardless of whether they are sold or leased. For example, if you rent an office space in a commercial building, you will have to pay VAT on the rent amount to the landlord, who will then remit it to the FTA.
Residential properties: These are properties that are used for living purposes, such as apartments, villas, townhouses, etc. Residential properties are generally exempt from VAT, meaning that no VAT is charged or paid on the sale or lease of these properties. However, there are some exceptions to this rule, which will be discussed later.
Bare land: This is land that has no development or construction on it. Bare land is also exempt from VAT, and no VAT is charged or paid on the sale or lease of bare land.
Charitable properties: These are properties that are owned by a charity and used for a relevant charitable activity. Charitable properties are subject to VAT at the zero rate, meaning that no VAT is charged on the sale or lease of these properties, but the charity can claim input tax credit on the expenses related to the property. However, to qualify as a charitable property, the property must meet the following criteria:
1. the property is owned by a Designated Charity that is registered with the FTA;
2. the property is used for a Relevant Charitable Activity that is consistent with the objectives of the Designated Charity, and
3. the property is not used to make any taxable supplies. A Designated Charity is a charity that is listed in a Cabinet Decision as being eligible for VAT relief. For example, if a mosque is owned by a Designated Charity and used for worship and education, it is a charitable property and is subject to VAT at the zero rate.

How Does VAT Affect The Real Estate Sector?

The real estate sector is one of the most important sectors in the UAE economy, as it contributes to the development of infrastructure, tourism, and trade. The VAT law in the UAE has different implications for different types of real estate transactions, such as:

The first supply of a new residential building is zero-rated, which means that no VAT is charged on the sale or lease of the property. The supplier can also recover the VAT paid on the costs of construction and development of the property.
The subsequent supply of a residential building is exempt, which means that no VAT is charged on the sale or lease of the property. However, the supplier cannot recover the VAT paid on the costs of construction and development of the property.
The supply of a commercial building is standard-rated, which means that VAT is charged at 5% on the sale or lease of the property. The supplier can also recover the VAT paid on the costs of construction and development of the property.
The supply of bare land is exempt, which means that no VAT is charged on the sale or lease of the land. However, the supplier cannot recover the VAT paid on the costs of the acquisition and development of the land.

VAT on Rent in UAE

Rent is the amount paid by a tenant to a landlord for the use of a property. The VAT on rent depends on the type and purpose of the property, as well as the duration and frequency of the lease.

VAT on Commercial Rent

Commercial rent refers to the rent paid for the use of a property for business purposes, such as offices, shops, warehouses, hotels, etc. Commercial rent is subject to VAT at the standard rate of 5%, irrespective of where the parties are resident. The landlord is required to charge VAT on the rent and issue a tax invoice to the tenant. The tenant is required to pay the VAT along with the rent and can claim it as an input tax credit if they are registered for VAT and use the property for taxable supplies.

If the property is partly commercial and partly residential, such as a mixed-use building, the rent is apportioned according to the floor area of each part. The rent for the commercial part is subject to VAT, while the rent for the residential part is generally exempt. However, the rules can be complicated and advice should be sought.

VAT on Residential Rent

Residential rent is the rent paid for the use of a residential property, such as an apartment, a villa, a townhouse, etc. Residential rent is generally exempt from VAT, meaning that the landlord does not charge VAT on the rent and the tenant does not pay VAT on the rent. The landlord cannot claim any input tax credit on the expenses related to the property, such as maintenance, utilities, etc.

However, there are some exceptions to the exemption of residential rent. These are:

Short-term leases to non-residents: If the property is leased out on a short-term basis to non-residents, such as tourists, visitors, etc., then it falls under the commercial category and is subject to VAT. The FTA has issued a guideline that defines a short-term lease as a lease for a period of less than six months. Furthermore, if the occupant has no Emirates ID and is leasing less than six months, then it would be deemed commercial from a VAT perspective.

First supply of a residential property: The first supply of a residential property is subject to VAT at the zero rate. This means that the landlord does not charge VAT on the rent, but can claim input tax credit on the expenses related to the property. The first supply of a residential property occurs when the property is rented out for the first time within three years of its completion. The subsequent supplies of the residential property are exempt from VAT.

Conclusion

VAT on rent in the UAE depends on the type and purpose of the property. Commercial rent is subject to VAT at the standard rate of 5%, while residential rent is generally exempt from VAT. However, there are some exceptions to the exemption of residential rent, such as short-term leases to non-residents and first supplies of residential properties. Therefore, it is important for landlords and tenants to understand the VAT implications of their real estate transactions and comply with the tax laws and regulations.

VAT Consultants in Dubai

Farahat & Co. offers its customers a complete range of services related to VAT. They provide consultations on all issues related to VAT such as Real Estate and Zero-rated supplies. They also provide VAT Accounting services that handle the filing of returns for your business.

You may be interested in reading: VAT on Commercial Real Estate in the UAE.