2018 brought with it great change for all UAE residents, with VAT starting to factor in on many decisions we make, financial or otherwise. The real estate industry, in several ways, has been affected by the new tax as well.
Residential units and VAT.
Residential units are VAT exempt. This means that most residential homes, as well as nursing homes, student and employee accommodation are not subjected to VAT, and hence there is NO VAT passed on to the buyer or renter. But that doesn’t mean renters are completely unaffected by VAT, as the next point addresses.
While residential real estate has No VAT charge, there are new residence-related VAT charges.
Several residence-related services have had the tax added to them, so these may be worth keeping in mind even if you are thinking of renting. Brokerage services now charge a VAT on their commision, while maintenance and service charges, chiller charges, bank service charges (in case you are getting a mortgage), Ejari, utility bills such as DEWA, and short term rentals like hotel apartments and AirBnbs all have the 5% tax added to them.
The difference between standard rated VAT, zero rated VAT and VAT exempt.
This is a fairly confusing yet important distinction anyone interested in the real estate market should know about. The standard rated VAT is the 5% tax that we are familiar with. As stated above, expect to pay it on commercial property.
Most residential units are exempt for VAT purposes. This means no VAT can be added to the rent.
The third category is "zero rated", which applies to some residential units as well. The first supply of residential real estate within three years from completion will be zero-rated (reported on a tax return but taxed at a zero percent rate) in the country. While this doesn’t really matter to buyers and tenants as they will not be charged anything extra, it makes a considerable difference to developers, as they can recover VAT related to development costs, including purchases of materials and professional services, such as engineers and the likes, which are liable to VAT.
VAT on commercial properties.
Standard rated VAT is applied on the purchase of a commercial property (such as an office unit) and is applied on the purchase price regardless of whether it was bought from the developer directly or from a resale.
You will also likely be paying standard rated VAT on the rent of a commercial property, if the owner is registered for VAT (which they must if their earnings exceed AED 375,000 per annum).
For more information about buying and renting properties in the UAE, visit https://www.zoomproperty.com/