It seems that there is no longer any doubt that with effect from January 1, VAT will be a reality in the UAE. The long-awaited UAE VAT legislation, namely Federal Decree Law (8) of 2017 (the VAT Law) is finally published 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. Here is how VAT will impact the real estate industry and, more specifically, lease agreements and property purchases.
The provision of real estate properties for rent and purchase is considered to be a “taxable supply” in terms of the VAT Law, although the law classifies the supply of real estate into several categories. The VAT Law differentiates between the lease of residential and commercial properties and also distinguishes between the supply of residential properties by a developer to a “first time” tenant or purchaser and the supply from a “first time” purchaser (or subsequent purchasers) to either tenants or purchasers thereafter.
As precursor to the below explanations, it is important to realize that there are two VAT categories, firstly there are goods that are “exempt”, where no VAT is charged on the supply and there are VAT-able supplies. With VAT-able supplies there are two VAT rates, firstly zero rated and standard rated supplies. Zero rated means that the supplier does charge VAT but at a zero rate (ie zero per cent), and the next is where VAT is charged at the standard rate, which will be 5 per cent (and in which instance, the invoice will reflect an additional 5 per cent VAT added to the invoiced amount.
Here is a summary of how the new law will impact upon some common property transactions:
The supply of “bare” or unimproved land will be exempt from VAT.
The “first time” supply of residential properties (by developers) within three years of completion, for both rental or purchase will be zero rated. Any person either renting or purchasing residential property as a “first time” tenant or “first time” purchaser will not pay VAT on the lease amount or the purchase price.
In addition to this provision, residential leases or any purchase of residential property from a “first time” purchaser will be exempt from VAT and thus no
VAT will be payable on either the lease amount or the purchase price on any subsequent residential leases or purchases.
VAT will be payable at the standard rate of 5 per cent on all commercial properties, both for rental and purchase. This means that with effect from January 1, VAT will be payable by commercial tenants and purchasers.
There are two scenarios that, however, need to be clarified. Firstly, in the event that a commercial lease agreement does not provide for VAT, it will be deemed that VAT is inclusive in the rent amount stated in the lease agreement, unless both the tenant and the landlord are both registered for VAT, in which event it shall be deemed that the lease amount is exclusive of VAT, and thus VAT will be charged on the lease amount. In this event the VAT effect should be zero on the lessee as the amount payable will be reclaimable against output VAT charged by the tenant. Secondly, subject to the first point, it must be stressed that if the rental period spans January 1, VAT will be payable on the prorate portion of the rental from 1 January 2018 till expiry of the lease, which will be payable even if the full year’s rental has already been paid prior to January 1, 2018.
Will VAT affect you?
One must not look past the fact that the associated costs relating to properties will attract VAT. These will include service charges, cleaning services and utility charges which will all attract VAT at the standard rate of 5 per cent, and accordingly the associated costs of renting or owning a real property will increase and should be budgeted for in assessing the affordability of real property transactions, whether for renting or for owning.
The Executive Regulations pertaining to the VAT Law have not yet been released and they will no doubt provide even more clarity once available.