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.
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:
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:
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:
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.
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.