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Value Added Tax on Real Estate Transactions

Value Added Tax on Real Estate Transactions

Lawgical with LYLAW

18 December 2018

Ludmila Yamalova:  Welcome and welcome back.  This is Ludmila with Lawgical with LYLAW.  To recap, in the previous segment, we discussed due diligence from the perspective of the seller in selling properties in the U.A.E.

In this upcoming segment, we’ll discuss the application of the VAT laws on the real estate sector in the U.A.E.  As of January 2018, the U.A.E. introduced the VAT.  Certain aspects of the real estate market are also subject to the VAT application.  As a general rule, all owners of commercial buildings, developers, and providers of services to the commercial or residential property sector should have registered with the federal tax authority before December 31st, 2017 if their taxable supplies made and imports received exceed a threshold of $100,000 for the last 12 months.  That’s the general rule.  More specifically, the VAT application depends on whether the property is residential or commercial in nature.

As a general rule, residential real estate is exempt from the VAT.  Residential real estate includes properties such as apartments, villas, or even certain labor accommodations that are residential in nature.  For residential real estate, the owner does not need to register.  The owner does not need to pay VAT on rent or sale, and the owner does not need to submit tax returns.

For developers, however, the first sale of residential buildings is rated at 0%.  The U.A.E. standard VAT rate is 5%.  As a general rule, commercial real estate is subject to VAT.  Commercial real estate properties include shops, offices, warehouses, clinics, hospitals, schools, universities, service departments, and short lets.  The VAT rate is 5% for the rent or sale of commercial real estate.  There are, however, certain exception.  In connection with selling commercial properties, the general rule is that they are subject to a 5% VAT.  However, if the property is rented at the time of sale, then the VAT does not apply.  For the purposes of renting commercial property, the VAT does apply.  The VAT rate is 5%.

There are certain other real estate transactions which are subject to special VAT treatment.  For example, labor accommodations.  Labor accommodations may be subject to VAT, depending on the type of property.  If labor accommodation is housed in residential buildings, it is not subject to VAT.  If labor accommodation is housed in serviced accommodation, then it is subject to 5%.  Also, there is special treatment of bare land.  Bare land is exempt from VAT.  There are certain other services that relate to real estate that are also subject to VAT.  They relate, for example, to maintenance of buildings, owners’ associations and related services, provision of electricity, water, gas, cooling, and other utilities, and real estate agent fees.

With regard to contractual provisions, addressing a party’s responsibility for payment of the VAT, in particular in connection with rental agreements, any agreements that were signed before January 2018, the obligation to pay the VAT falls on the tenant, even if the agreement does not specifically state so.  However, any other contracts that were entered into after the introduction of the VAT, in order for the tenant to be obligated to pay the VAT, the landlord is required to include that specific clause in the rental agreement.

There is one other important issue to address with regard to VAT for purposes of real estate transactions and that (1) the form of payment and (2) the timing of payment.  In general, the VAT is due either upon services being performed, the invoice being issued, or the payment being received.  Therefore, in connection with rental agreements, landlords should request for the tenants to issue payment for the VAT along with and corresponding to the number of checks that are being issued.  For example, if the tenant pays rent in one check, then the VAT payment for the whole year should also be included as part of that payment.  If the tenant pays rent in four checks, then the VAT payment should be included with every check.

This concludes our discussion on VAT application to real estate transactions and the real estate market in the U.A.E.  Thank you for listening.  Tune in for our next segment on insurance in the context of real estate transactions.