For UAE business folk, there is no escaping the fact that January 2018 will see the introduction of VAT on sales and leases of commercial property, as recently confirmed by the country’s Ministry of Finance.
Offices, shops and other commercial property will be subject to the new 5 per cent levy. However, sales and leases of residential property will be exempt from the tax, along with undeveloped land. Property development and the first sale of new homes will be subject to a zero rate of VAT.
The word tax may strike fear into those who have lived and worked in the country for a long time, but several real estate professionals say they in fact welcome the move.
“I believe buyers see this as a positive step forward for the UAE property market, another formation in the ever-developing end goal for the UAE,” says Alexander Cina, Senior Sales Executive at Dubai’s Dacha Real Estate.
He doesn’t see a large impact as the trade will adapt to this change and embrace the movement.
Short-term impact
“Applying VAT to off-plan sales will push up prices in the short-term, stunting demand,” Cina explains.
“It will have a relatively negative impact on the off-plan market, in comparison to the resale market. With all that said, it won’t stop investors from flipping as the effect of the VAT tax will be felt across the economy in a mechanism where most costs and prices will self-adjust at a higher level,” he adds.
Entrepreneurs in the UAE are used to shifting business landscapes and many say the new tax is an inevitable part of doing business in a rapidly expanding market.
Catherine Granger, a long-time British expat and the owner of the management consultancy Trajan Consulting, believes there’s no need for panic. “Although no new tax is ever welcomed, it was good to hear about the full details of the tax as introduced by the Dubai government finance department.”
The new rules bring the emirate in line with the rest of the world, she adds. “It certainly would not put me off buying commercial property in Dubai,” she says. “As a commercial hub, the city has many attractions for would-be investors or business owners — location, diversity of business, infrastructure and support are all what make Dubai great.”
The Ministry of Finance also confirmed that businesses that provide taxable goods or services with annual revenue of more than Dh375,000 will be required to register. Businesses with taxable supplies between Dh375,000 and Dh187,500 will also have the option to register.
The ministry is to begin registrations this year.
Unknown factors
“I think with all these things, dealing with the unknown is far worse than dealing with the known and now that the details of the new tax are coming out, occupiers will able to put the right systems in place in preparation to deal with it,” says Matthew Dadd, a real estate partner at Knight Frank in Abu Dhabi.
While the pending tax is not on everyone’s radar, the effects of the news will be felt soon enough, points out Ahmet Kayhan, President and Founder of real estate information provider Reidin.com. He says most investors are not aware of the VAT element yet, but as the deadline nears, the number of commercial property transactions are expected to increase significantly as investors rush to avoid the extra cost.
“It will certainly have a negative impact on the transaction volume of the commercial properties by increasing the pricing,” adds Kayhan. “Commercial properties, especially retail and office, have a lot of pressure on the asset class. Extra cost won’t help with the currently weak position of that property type.
“I understand the reasoning behind the VAT, but when it comes to real estate it’s by nature a very different asset class. It shouldn’t be considered as a consumer good. It impacts around 18 different industries within its supply chain.
“We have seen the effect in many other countries — the lower the tax on the property, the higher the volume of transactions.”
His suggestion is for VAT to be implemented within different ranges. “For example the lower the unit size and price is then lower the VAT — say, 1 per cent. And the bigger the size and the more luxurious the property is, then increase the VAT — say, 8 per cent.”
For now, however, firms looking for commercial units at this week’s Cityscape Global would do well to acquaint themselves with the latest VAT news and updates.
