VAT will create pressure on cash flow, which people will have to get used to Image Credit: Shutterstock

The year began with the implementation of a landmark policy by the UAE government — the introduction of value-added tax (VAT) at a rate of 5 per cent. Halfway through the year, it bears reviewing to see how VAT has affected the real estate sector. The answer to that is — marginally.

The issue of VAT generally becomes a matter of cash flow. There is no reason for it to negatively impact the inherent value of real estate. Ultimately, its bearing has been minimal in terms of adding further costs to real estate transactions. The receding prices, both in the buyer’s and renter’s market, have certainly helped the investor and the tenant.

Who is affected

All real estate transactions, apart from the sale of vacant commercial property and commercial property leases, are either not subject to or exempt from tax. Leased commercial property, for its part, is also not considered as supply during its sale by a taxable person, and hence not taxable.

If one had to take a holistic view, up to 85 per cent of the components of Dubai’s real estate sector are not subject to VAT. Who is then affected in the real estate chain? The VAT law states that residential rent is zero-rated. In other words, there is no VAT charged on the rent for residential accommodation. However, it is possible that a residential tenant benefits from other services — either included in the rental agreement or in addition to the agreement — that are subject to VAT. For example, the property in question may have utilities or cooling that are invoiced by the landlord and charged to the tenant, or perhaps the tenant has secured an extra parking space.

Subject to the landlords being VAT-registered and issuing a VAT invoice mentioning their taxpayer registration number (TRN), the tenants in these cases would be liable to pay VAT for the services other than the residential rent.

It is important to note that if the tenancy contract spans the period from 2017-18, an invoice should be issued for the VAT that applies from January 1, 2018 until the end of the applicable agreement.

Commercial rents

From the perspective of a commercial tenancy contract, the landlords should be VAT-registered in order to charge and collect VAT on behalf of the Federal Tax Authority (FTA). Again, this is to be invoiced by the landlords, their managing agents or appointed VAT agents. The tax also applies to all extra charges, such as building services, utilities and additional parking.

So ultimately, VAT certainly does impact tenants, both residential and commercial, but in different ways.

Psychological

The impact of VAT is more psychological, as the increase is barely significant. With the benefits of VAT far outweighing the immediate concerns surrounding taxation in the UAE, there is good potential for the country’s construction industry. Notably, it is forecast that the UAE will have the second-fastest growing construction sector in the world this year at 10.2 per cent. However, there is pressure on cash flow that people are yet to get used to.

The good news is that the industry’s strong growth potential, the World Expo 2020 and the upward trajectory of the hospitality and health care sectors, combined with a massive inflow of visitors and medical tourists, are bound to ease the impact of VAT in the long run.

Morgan Dalton is associate director, asset management, at Asteco. The views expressed here are his own.