The impact of VAT in the real estate! Would you pay more for your rent in Dubai?

The long-awaited UAE VAT legislation, namely Federal Decree Law (8) of 2017 (the VAT Law) is finally out and everyone can at last be properly informed about the impact of VAT on their everyday lives, as well as all the various industry sectors that will be affected thereby.

In the normal course of the application of VAT, the construction and supply of commercial, industrial and retail properties, in addition to the construction of infrastructure, is treated as subject to VAT at standard rate of 5%.

However, certain sections of the real estate sector will be exempt from VAT, as follows:

• Bare, or unimproved land will be exempt from VAT.
• First time supply of residential properties by developers within three years of completion, for both rental or purchase will be zero rated.
• First time residential property renters will not pay VAT on the lease amount.
• First time residential property purchasers will not pay VAT on the purchase price.

On the other hand:

• VAT will be payable at the standard rate of 5% on all commercial properties, both for rental and purchase, with variations for different scenarios.
• Service charges, cleaning services and utility charges will attract the standard VAT 5% rate.

From a developer’s standpoint, VAT will certainly impact the price of construction projects, since goods and services related to construction are taxable, so large scale developers are more likely to feel a pinch, unlike the consumers, that will not be subjected to VAT as first-time buyers or renters, which means that there won’t be any significant changes in the patterns of consumer’s behavior.

“On buildings that have not been finished or are only three years old, the first sale will be zero-rated. So, your deposit and completion payment will not be subject to VAT,” says Justin Whitehouse, Middle East indirect tax leader at Deloitte.

VAT could generate Dh12 billion in its first year and Dh20 billion in its second year, according to Sultan bin Saeed Al Mansouri, UAE Minister of Economy. This amount will be used as reinvestment in infrastructure and domestic projects, which will subsequently draw more people towards UAE, and will lastly benefit the real estate market.

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