As of January 1, 2018, the UAE has implemented Value-Added Tax (VAT). According to the Federal Decree Law (8) of 2017, commercial properties are subject to a levy with a standard rate of VAT 5%, while residential properties remain VAT exempt on their first round of sales. As the real estate sector is a cornerstone of Dubai’s economy, there are many implications of VAT for Dubai’s landlords.
Commonly known as Value Added Tax, 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.
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.
Within the first three years of completion, the “first-time” supply of rental residential properties is zero-rated. That applies for both rent and sale. The subsequent rental or purchase of residential property as a “first-time” purchaser or “first-time” tenant does not require VAT on the rental or sale amount.
As a precursor to this provision, residential property purchases and leases from “first-time” buyers do not require VAT on any sale or lease amount.
A standard of 5% is imposed on the rental and sale of all commercial properties. As a landlord, if your lease agreement doesn’t spell out VAT, it deems the rent amount as VAT inclusive. However, if both the landlord and tenant are registered, it’s assumed that the stated amount is VAT exclusive. Thus, it is levied on the lease amount. In this case, the lessee’s payment should be zero. This occurs because the payable amount is recovered from the tenant’s output VAT.
If it is the latter, then a portion of the rent includes the VAT until the lease expires. That happens irrespectively of whether the annual rent has been paid.
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 to 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 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.