Dubai has emerged as the ideal real estate investment destination in the Middle East because there are no taxes on home sales. However, that doesn’t mean that landlords operate in an absolutely free environment. There are private community fees, such as an owners’ association and it is usually pegged and calculated per square footage. In Dubai, the landlord tax is minimal but still important.
According to the Federal Tax Authority, beginning on Jan 1, 2018, the authorities have been implementing a VAT of 5%. Many landlords wonder whether this will affect the rental business.
Commonly known as Value Added Tax, a VAT is an invoice-based consumption tax assessed incrementally at every point of sale where a value gets added. It applies to the consumption of most goods and services. Under this new tax system, all sellers will collect the tax from consumers and then pay it to the government. It differs from the normal sales tax. Although residential is either exempt or zero-rated, commercial dealings are an extra 5%.
Real estate properties available for rent or purchase are a “taxable supply”. So, the value of any property in Dubai put up for rent or sale will increase as a result.
Residential buildings are zero-rated during the first three years of construction. Subsequent supplies are the same.
Sale of the residential portion of a mixed-use building will be exempt or zero-rated. This is dependant on whether it’s the first supply or subsequent supply. For the commercial portion, sale or rent has 5% VAT. Landlords apportion and categorize the taxable supply. There is a 4% one-time registration fee when buying or selling a residential property. The buyer and seller split it in half.
Be aware of other indirect taxes and other transactional related costs. These costs and fees fall under three major categories:
For example, purchasing a property worth AED 3,700,000. Then pay a tax of AED 148,000 to DLD. Followed by a title deed and transfer of AED 4,500.
When being financed by a mortgage, there is an additional registration fee (0.25% of the loan). That is not including the 1% mortgage processing fee, 0.1% valuation fee, 2% brokers’ commission, and legal fees.
In Dubai, most taxes and fees get automatically collected. Inheritance taxes are not imposed. There is simply a 4% ownership transfer fee to pay. As opposed to many other countries, there are no property gains taxes here.
VAT is a relatively new reality in Dubai. The VAT affects the landlords of Dubai in several key ways.
The VAT law in the real estate sector applies to construction, real estate development, sale, and leasing of property. According to VAT laws, landlords have a “taxable supply” by way of properties they own. These laws further delineate the VAT into several separate categories:
When it comes down to registering property on the land department’s registry or a rental contract in Ejari, VAT is unlikely to apply. Any movable property is commercial for VAT purposes. For example, a mobile home wouldn’t qualify.
Developers can recover VAT related to development costs, including purchases of materials and professional services, such as engineers. Developers, in this case, make no revenue during the construction period, but zero-rated supply. It means they can register for VAT and claim back input VAT.
A developer providing both, exempt residential and standard-rated commercial property, would still be able to register. The only complication would be having to calculate which VAT is recoverable and which is not.
Keep all of your records for at least five years. This is advisable although electronic copies are acceptable. If you are in any doubt of what records you should keep, seek professional help. The fines and penalties for non-compliance are significant. Inexperience or ignorance of the law is not an acceptable excuse.
The concept of landlord tax in Dubai may seem daunting since there are newly developed rules. The most important thing is to do your research and stay on top of any requirements and deadlines.
As a landlord, it’s critical to have all of your contracts reviewed by lawyers. If you lease your property through a company like Blueground, we take care of all aspects of payment, including VAT. We handle contracts and payments so you don’t have to. That’s why landlords in Dubai love working us.
The UAE Federal Government doesn’t directly impose taxes on landlords. It is highly unlikely that they will start doing so, given the significance this aspect has achieved. Dubai is one of the best property markets in the world. If you’ve got an investment property here, let us handle it so you can sit back, relax and collect your passive income.