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.
Also read: VAT Registration Services in Dubai
The UAE VAT Law and the Federal Tax Authority (FTA) have defined and classified different types of properties for VAT purposes.
The main types are:
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.
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.
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.
These are properties that are owned by a charity and used for 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 the input tax credit on the expenses related to the property.
However, to qualify as a charitable property, the property must meet the following criteria:
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:
| Scenario | VAT Rate | VAT Applicability | Landlord Can Reclaim Input VAT? | Notes |
|---|---|---|---|---|
| First supply of new residential property (within 3 years of completion) | 0% | Zero-rated | Yes | Applies only to newly built properties sold or rented within 3 years of completion. |
| Subsequent supply of residential property (sale or rent) | Exempt | No VAT charged | No | Applies to resale or rental after the first supply. |
| Lease of residential property | Exempt | No VAT charged | No | Routine residential leases are VAT-exempt. |
| Service charges and utilities (if billed separately) | 5% | VAT applies | Yes | Maintenance, cooling, and utilities are subject to 5% VAT if charged separately. |
| Sale of bare land for residential construction | Exempt | No VAT charged | No | If land is not developed, VAT does not apply. |
| Sale of developed land (with residential units) | 0% or Exempt | Depends on whether it’s the first or subsequent supply | Yes / No | 0% for first supply, exempt for later sales. |
| Security deposits (refundable) | 0% | Not subject to VAT unless forfeited | Not applicable | VAT may apply if the deposit is retained (e.g., for damages). |
| Type of Property | VAT Rate | VAT Applicability | Landlord Can Reclaim Input VAT? | Notes |
|---|---|---|---|---|
| Residential (First Supply within 3 Years) | 0% | Zero-rated | Yes | Applicable only to newly constructed residential buildings (within 3 years of completion). |
| Residential (Subsequent Supplies) | Exempt | No VAT charged | No | Regular residential rent is exempt from VAT. |
| Commercial Property | 5% | VAT must be charged on lease or rental | Yes | Applies to offices, warehouses, retail units, etc. |
| Mixed-Use Property | Mixed (0% / 5%) | Proportional VAT based on residential and commercial portions | Partially | VAT applies only to the commercial portion of the property. |
| Security Deposits | 0% | Not subject to VAT unless forfeited | Not applicable | Forfeited deposits may be considered taxable. |
| Maintenance & Utilities (if charged separately) | 5% | VAT is applicable if billed separately | Yes | Charged in addition to rent; considered a taxable service. |
| Real Estate Agent Fees | 5% | VAT must be charged on service fees | Yes | Commission and service fees are always subject to VAT. |
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.
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.
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:
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, landlords and tenants need to understand the VAT implications of their real estate transactions and comply with the tax laws and regulations.
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.