It’s 2018 – Time to factor VAT into real estate dealings
Value added tax (VAT) is now a reality, and although residential real estate in general is exempt, or zero-rated, commercial property dealings will attract an extra 5 percent on top, and affect residential in a more roundabout way.
What is taxable?
Any property leased out, or sold as, commercial property, such as offices and retail assets, even car parking, unless provided as part of a residential property, based in the UAE.
However, a property holding company only holding shares in other property companies is not a business, and can’t register for VAT.
In addition, non-resident owners and/or tenants won’t escape the 5 percent VAT.
“If the landlord and tenant are both non-residents, the landlord has to register for VAT if the property is situated in the UAE, as there is no one else who could account for that VAT,” explains Senior Tax Advisor at Al Tamimi & Company, Shiraz Khan.
Furthermore, lease incentives, such as free office fit outs could be subject to VAT but only if the tenant provides something in return.
“VAT will also be applicable to rents payable under commercial rental contracts, which have commenced in 2017 but run into 2018, but only in respect of rents that relate to the 2018,” alerts Khan.
Any property, which is not fixed to the ground so movable, would also be considered commercial for VAT purposes, think mobile homes for example.
Obviously, regular hotels B&B, serviced apartments, are also VAT liable, but residential property, leased out on a short-term basis to non-residents also falls under the commercial category.
“If a lease is less than six months, and the person living there doesn’t have an Emirates ID, it would be deemed commercial from a VAT perspective,” explains Khan.
The importance of exempt versus zero-rated property
In tax jargon, commercial property is standard rated meaning 5 percent VAT applies, whilst residential property is in general exempt from VAT.
“Anything that is designed for living in, such as your own home, nursing homes, student and employee accommodation, would be considered residential and exempt for VAT purposes,” says Khan.
However, there is a third category the zero-rated supply, which can also apply to residential.
“The first supply of residential real estate within three years from completion would be zero-rated in the UAE, in addition to the first supply of charity related buildings, and those buildings converted from commercial to residential, as well as UAE Nationals building their own home,” Khan details.
Whilst it doesn’t affect the buyer, or tenant, of such a property, as there is no VAT to pay, it is an important distinction for developers, as they can recover VAT related to development costs, including purchases of materials, and professional services, such as engineers and the likes, which are liable to VAT.
“Developers make no revenue during the construction period, but zero-rated supply, contrary to exempt supply, means they can register for VAT and claim back input VAT,” explains Khan.
“Subsequent supplies of residential would be exempt from VAT, land without infrastructure also exempt supply, then you can’t register for VAT,” he adds.
A developer providing both, exempt residential and standard rated commercial property, would still be able to register, the only complication being to calculate, which VAT is recoverable, and which not.
Reclaiming VAT to register or not to register
“As a developer a refund mechanism is available to reclaim VAT incurred on development costs. The authorities can approve the claim within 20 days, or ask to extend the time to approve the application. Once approved they will pay the refund within five days,” says Khan.
Obviously, as a developer it makes sense to register, but for smaller landlords, or service providers in relation to property, it could be a matter of choice, if there was one.
“If you have a yearly revenue of over Dh375,000 you have to register, but if your revenue is just over half of that, one can voluntarily register but there is no obligation,” explains Khan.
Indirect VAT effect on residential and increase in prices?
Just because residential sales and lease prices aren’t burdened with VAT, that doesn’t mean VAT won’t come into play in daily life.
For example, DEWA and real estate, sales and leasing, are both classified as taxable goods and services, according to Khan. This means for tenants that the next electricity and water bill will feature 5 percent on top of the usual amount expected.
Equally, when asking a real estate agency to help finding a property for sale, or rent, or even just to manage ones property, or draw up a sales agreement, VAT will be added to those services. So, expect agency commissions to become a little steeper.
“Real estate agents must charge VAT on their services, if they are registered for VAT, regardless of whether the property is residential or commercial,” Khan remarks.
The same applies to any other professional services provided in the real estate sector, be it facility management, repairs having to be carried out on ones property and so on.
“In the case of residential property, the sales and leases of property in the secondary market will be exempt from VAT, and thus owners and landlords will not be able to recover VAT on their purchase (e.g. maintenance costs) related to the sale, or leases,” Khan cautions. In other words VAT expenses incurred maintaining a property are simply not recoverable by selling or leasing the property, unless one increases the price of the home accordingly.
However, Khan reckons this is unlikely to happen in the near future.
“Although the landlord can increase the sale price or rents, in practice, given the current residential property market, it may be difficult for landlords to pass on this cost to purchasers and tenants, and therefore the landlord is likely to absorb the VAT cost. The VAT cost is not expected to be significant for residential landlords in any event,” he says.
What does VAT mean for EJARI and the likes?
When it comes down to registering property on the land department’s registry, or a rental contract in EJARI, VAT is unlikely to apply, according to Khan.
In general, he explained, that fees charged by government as a public authority in a sovereign capacity meant no VAT would be applicable. However, if the fees were generated from a commercial activity conducted by the government, VAT would apply,” he details.
“Land department registration fees should not attract VAT because these are likely to be regarded as a fee charged by a public authority performing a function in its sovereign capacity,” Khan concludes.