Dubai: The value-added tax has had limited impact on the local real estate sector, according to top officials with the Dubai Land Department and FTA (Federal Tax Authority).
“Eighty-five per cent of components in Dubai’s total real estate sector are not subject to the 5 per cent VAT,” said Sultan Butti Bin Mejren, Director-General of Dubai Land Department. “When reviewing the details of sales, rents and other transactions, we found that the value of bare land sales, residential properties, and occupied commercial and retail properties comprise the largest percentage of total properties traded during 2017.
“This ratio is expected to remain over the coming years and even stands to increase with commercial offices continuing to improve their leasing operations and minimise empty units.”
Commercial lease agreements accounted for 31 per cent of properties rented in Dubai, or Dh21 billion out of Dh66 billion registered rents.
In the case of buying a commercial building and converting it into a residential building, the buyer is entitled to recover the tax paid within a period of three years from the date of transfer. The same applies if the customer rents a residential property that has been built. As for mixed-use buildings, the residential part is subject to exemption or zero rate according to its percentage of the building, while the commercial part is subject to tax.
Leased commercial properties are not considered as a supply for the purposes of VAT when sold or disposed of by any transaction resulting in the transfer of ownership to a taxable person registered for tax purposes. (The procedures for renting or selling commercial and industrial properties in designated zones are outside the scope of tax.)
The sale of vacant commercial properties or the off-plan sale of commercial properties under the building license are subject to a 5 per cent VAT. However, the tax paid during the lease period can be recovered through the tax return of tenants if they are registered for tax purposes and entitled to tax refund. Tax paid towards the purchase of an entire building may be recovered according to the capital asset scheme, if the cost of the property exceeds Dh5 million.
Real estate-related services including brokerage, management and consultancy are subject to 5 per cent VAT on the value of the service rendered at the location where the property is located.
“The Federal Decree Law No. 8 of 2017 on Value Added Tax and its Executive Regulation provide several mechanisms to ensure the continued competitiveness of the real estate sector,” said Khalid Ali Al Bustani, Director-General of FTA. “For example, the law stipulates that the first supply of residential buildings within three years of completion is subject to the 0 per cent tax rate, which means that owners or investors can recover the tax related to the expenses incurred on construction. Residential buildings will be exempted from tax after first supply.”
