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VAT on Residential Real Estate in the UAE

VAT on Residential property, Value Added Tax (VAT) is an indirect consumption tax, imposed on the purchase for the consumption of goods and services. The standard rate of 5% VAT is applied across the GCC countries. The VAT is levied on taxable persons and business, which is individuals and business registered for VAT. The Federal Tax Authority (FTA) governs the VAT procedure in the UAE. The VAT is charged at each part of the ‘supply chain’, the burden of which is ultimately borne by the consumers that purchase the goods or services.

Also read: How to Pay VAT on Commercial Properties in UAE?

VAT on the Rent and Sale of Residential Properties

  • Currently, there is no VAT to pay for Residential properties in the UAE. The landlords of residential properties generally exempted from VAT payments during lease or sale of the property.
  • If the goods or services supplied under the exempted category such as Residential properties, then all VAT paid on purchases or expenses can not be refunded.
  • Further, any VAT paid for services of the residential property, such as service charges, maintenance charges, electricity, or water, cannot be recovered.
  • The Developers of a property may required vat registration in UAE as in the UAE VAT law. However, they have to sell the new property at 0% VAT. The developer can later recover VAT on all the business costs. By charging a 0% VAT, the buyers or sellers do not have to pay any VAT amount. However, a zero-rated property allows the developer to register for VAT and claim back the input VAT (the VAT charged on purchases)
  • A UAE citizen constructing their own house can be subject to VAT for supplies and building materials during the construction. They can later file for a refund of VAT within 6 months of the completion certificate.

Zero-rated Supplies

  • Article 45 of the UAE VAT laws governs the concept of zero-rated supply.
  • Zero-rated supplies mean that those supplies charged with 0% VAT. This means that the purchaser does not pay any VAT on those goods or services.
  • This is different from Exempted supplies as the Seller under a zero-rated transaction can recover any VAT paid on the purchase or any expenses made during the making of such goods or services. In this case, the Seller can recover the VAT paid on raw materials of a zero-rated property.
  • A residential property can be considered as a zero-rated supply if the property is not more than 3 years old from the date of completion. After which, the residential property will be considered exempt from VAT.
  • If a commercial property converted into a residential property for either lease or sale, then the zero-rated scheme will apply for only one time at the first supply. Which means the scheme apply only the first time the property after conversion gets rented or sold.
  • Developers can recover a refund of VAT on the construction of the residential property, as the first supply of the property will be zero-rated.

Also read: VAT Penalties Explained

Types of Residential properties

The Federal Tax Authority (FTA) recognizes the following as residential properties:

  • A villa, townhouses, flats, apartments that do not provide any services such as bread and breakfast or perform any commercial activity.
  • Accommodation for students such as hostels or housing for laborer’s
  • Housing facilities for military, armed forces, or police.
  • Properties such as orphanages, nursing homes, and retirement homes

Mixed-Use Developments

  • Mixed-use developments are buildings that blend 2 or more types of developments, such as residential, commercial, or industrial.
  • The most common projects of mixed-use buildings in the UAE consists of commercial units such as offices or retail stores, and residential houses.
  • The VAT in such projects calculated by distinctively dividing the building into residential and commercial.
  • The lease or sale of the residential part of the building will be subject to either zero-rated supply or exempted scheme for VAT. If this is the first supply within the three years of the completion certificate, then the zero-rated supply scheme will apply. Otherwise, the exempted scheme will apply for VAT.
  • The lease or sale of the commercial part of the building will be subject to 5% VAT
  • If any part of the building other than the commercial properties used for commercial use. The property will subject to 5% VAT.
  • If a mixed-use building entirely sold then only on the commercial portion, 5% VAT will calculated. The residential portion will be subject to either zero-rated or exempted VAT.

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

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 filling of returns for your business.

Ervee is a CPA with international experience in Tax and Accounting. He has over 12 years of experience in accounting and bookkeeping and over a year in VAT implementation, registration, and accounting in UAE. He regularly drives out inefficiencies in company operations and loves the challenge of helping clients find additional ways for an easier and improved compliance and verification of transactions. Read more