Everything landlords and real estate professionals need to know to comply with UAE VAT regulations for commercial and residential real estate properties
As a UAE real estate owner or professional you might be wondering how the newly implemented Value Added Tax (VAT) will affect your business?
A good way to approach this is to consider what you need to comply with: some real estate transactions are exempt from VAT, while others attract 0% or 5% tax rate. This means you may have to register in certain circumstances but not in others!
What adds to this confusion is that the culture of taxation is new to the UAE, and most VAT-related information is shrouded in technical jargon.
That must be intimidating, right?Don’t worry though – that’s exactly why we created this guide: to simplify VAT rules for real estate landlords and professionals in plain English.
In essence, we have distilled the complicated rules to point you in the right direction.
If you read through to the end of this post, you will definitely walk away with valuable and actionable information regarding the following topics:whether you have to register for VAT, how you can a waiver from registration, and when voluntary registration might be beneficial to you.
Let’s get started.
Table of Content
- Chapter 1: Basic VAT concepts every real estate professional should know
- Chapter 2: Is Real Estate Goods or Services?
- Chapter 3: How to calculate VAT for Residential Properties
- Chapter 4: How to calculate VAT for commercial properties
- Chapter 5: Decoding VAT on supplies between landlords and tenants
- Chapter 6: All about VAT on mixed use real estate developments
- Chapter 7: Real estate and registering for VAT
- Final Thoughts
Chapter 1: Basic VAT concepts every real estate professional should know
Don’t worry, this is not going to be complicated and boring: we have just curated and deconstructed some industry concepts and jargon to make VAT compliance easier for you.After all, as a business leader you need to have all the important bits at your fingertips to streamline the compliance process.Ready to get started?
Many business people think of supplies as general purpose consumables such as stationary.
But, in the context of VAT, “supplies” are either a) the goods and services that you sell to customers or b) goods and services you purchase in order to provide your own goods or services.
For instance, if you produce windows, then your supplies are “windows.” The purchases you may need to produce your supplies, such as glass panes and wood panels are also called supplies.
So, the next time you hear the word “supplies” in the context of VAT, just mentally replace them with “goods and services.”
Input and Output VAT
It is super easy to understand how VAT works.
When you provide your goods and services (or supplies) as a business owner, you will need to collect tax, whose rate depends on the type of the supplies. This is known as output VAT.
Now, when you purchase goods or services to produce your goods and services, you’ll need to cough up tax to pay your suppliers. This is known as input VAT.
This tax collection has to account for something right?
So, at regular intervals, you’ll have to determine the tax you owe to the government, or your due tax.
Tax due = output tax – input tax
This would ideally be an outgoing amount, but if you’re one of those lucky business entities who collect less than they pay in taxes, you’re eligible for a tax credit.
You will need to know what tax category your supplies fall under in order to determine the applicable tax rate.
There are three tax categories
- Exempt: No VAT is applicable
- Zero rate: VAT is applicable, but at the rate of 0%
- Standard rate: Standard VAT is applicable (currently 5%)
This diagram shows which supplies fall under the zero-rated and exempt categories. Everything else is standard rated.
Check out this FTA issued document for more information about zero-rated and exempt supplies.
Now, you must be stumped why “exempt” and “zero rate” are separate categories since their net cash effect is zero.
While they may appear to be the same to the less seasoned, there are three key differences.
First, Input tax and output tax
Do you remember how we calculated due tax with this formula from Chapter 2?
Tax due = output tax – input tax
In the case of zero-rated supplies, the output tax (the tax you collect from your customers) is zero. On the other hand, input tax (the tax you pay to your suppliers) may not be zero. You can claim back the input tax related to zero-rated supplies. However, you cannot claim back the input tax you paid to provide tax exempt supplies.
Let’s clear this up with a couple of examples.
For example, let’s assume you export garments that you buy from local suppliers. Exports are zero-rated, so no VAT will collected from your customers. However, you can claim the VAT you pay your suppliers.On the other hand, if you sell life insurance (which is VAT exempt) then you cannot claim back the taxes you pay to provide such services, such as rent and office supplies.
The second difference between zero-rated and exempt supplies deals with registration threshold. Zero-rated supplies are part of your registration threshold (will explain in depth in Chapter 7) whereas tax exempt supplies don’t count.
This is a straightforward concept but we wanted to mention it anyway. Basically, any company registered in the UAE and not in a designated zone is a mainland company.
Federal Tax Authority (FTA)
FTA is the government authority responsible for managing all taxation activities in the UAE. Needless to say, you will interact with the FTA for all your taxation-related exchanges. Thankfully, most of FTA’s services can be availed electronically (www.tax.gov.ae), including registration and filing.
Chapter 2: Is Real Estate Goods or Services?
As we saw in the previous section, in VAT regulations, supplies can mean both goods or services. Now the real question: is real estate a supply of goods or services?
When it comes to real estate, you will have first determine whether your real estate transactions are categorized as real estate goods or real estate-related services.
According to the regulations, a supply of real estate is considered a supply of goods. A supply of real-estate-related service is obviously a service.
So, what exactly is considered a real estate good?
It means one of two things:
- Sale of real estate properties (villas, apartments, entire buildings, etc.)
- Long term lease or rent of real estate properties.
You may be surprised to know that the rent and lease of properties is considered a supply of goods from a taxation point of view. But it is!
Just remember this: selling, renting, and leasing a property are all considered sale of goods. Everything else is a real-estate-related service.
One more thing:
“Long term” in this context means a lease or a rental agreement that is longer than 6 months and is not an extension of an existing lease.
So, what are real-estate-related services?
Some concrete examples are:
- Real estate agency or brokerage services
- Real estate engineering consulting
- Property demolition
- Property maintenance
You may be asking: why you should care whether my real estate transactions are classified as a good or a service?
In the UAE, it boils down to two reasons:
1. VAT rates are different for types of goods and services
The foremost reason for classifying your real estate transaction is that VAT rates are different for goods and services. Basically, you’ll have to first classify the good or the service to apply the relevant rate.
According to the law, real estate (treated as goods) could be VAT exempt or attracts zero-rated or standard rated VAT. When you provide real estate-related services, the standard rate (5%) is applicable, just like many other services.
2. Location determines VAT treatment
One of the rules that determines if you should charge VAT is location: If the goods or services are supplied in the UAE, then VAT is applicable. Otherwise, it is not.
So, how do you apply this rule to real estate and real-estate-related services?
When it comes to real estate transactions (which is goods), applying the rule is easy: if the property is in the UAE, then you should charge VAT.
Consider this: a UAE-based company purchases a hotel in the UK and the contract is signed in Abu Dhabi. No VAT is applicable here as the property is not located in the UAE.
But, how do you apply this rule to real estate related services? Simple: look at the real estate property the service is related to. If the property is in the UAE, then UAE VAT regulations are applicable.
For example, if a UAE-based company hires a British firm to design a new tower in Dubai, then UAE VAT is applicable because a real estate service is being purchased for a property in the UAE, even though the service provider resides outside the UAE.
Chapter 3: How to calculate VAT for Residential Properties
VAT calculation for sale or lease of residential properties is quite straightforward: They are either exempt from VAT or zero-rated (0% VAT.)
When the property is exempt, VAT is actually not applied to that transaction and the invoice doesn’t record it either.
When the property is zero rated, the landlord charges 0% VAT and this is reflected in the invoice.
This means that the tenant won’t be financially affected if the property is either exempt or zero-rated. Then why have exempt and zero rating? We will explain this in a minute.
What do exempt and zero-rated VAT on residential properties mean?
According to UAE law, the main factor that determines whether a residential real estate transaction is zero-rated or VAT exempt is the time of supply of the property.
Let us explain.
If the property is new, you’ll need to charge 0% VAT on the first supply (i.e., the first lease or sale) of the property within the first three years of completion. After the first supply, the residential property rolls back to being VAT exempt.
Let’s clear this up with a few examples.
When a brand new villa is sold to its first owner within the first three years of completion, the invoice will reflect 0% VAT. Now, if the villa is sold again (even if within the first three years of its completion), it will be VAT exempt, having already satisfied the “first supply” VAT criteria.
When a tenant signs a one-year lease for a new apartment within the first three years of completion (becoming the first person to lease it), the transaction would attract a 0% VAT. When this lease is renewed, it will be VAT exempt according to the regulations.
When a developer fails to lease a newly completed apartment in the first three years of its completion, but is able to lease it out in the fourth year, the transaction would be VAT exempt.
So you must be thinking, if the net effect of both transactions (exempt and zero rating) does not affect the tenant, then why have this distinction in the first place?
Simple: because they affect the landlord.
Here is the deal:
Let’s consider that as a landlord of a newly constructed building you’ve just started leasing out apartments to tenants. In the process you will incur some expenses such as electricity for common areas, maintenance, and security, right? Naturally, The suppliers of these services will charge you VAT.
Now, if your expenses are used to serve zero-rated leased apartments, then you can claim back the VAT you paid on these expenses. However, if your expenses are used to serve exempt leased apartments, you cannot claim back the VAT on these supplies.
Lastly, if your leases comprise both zero-rated and exempt leases, you’ll have to split the transactions and claim back the VAT only on the zero-rated leases. We’ll explain this further in another post about VAT apportionment – stay tuned!
A few things you should keep in mind:
Hotels and service apartments are not residential real estate
From a taxation point of view, providing accommodation, how hotels or serviced apartments do, is considered real-estate-related services not a supply of real estate. This means the standard VAT rate (5%) is applicable in such cases.
When it comes to residential properties, the rule of “first supply” (first sale or lease within the first three years) apply to newly completed properties. Interestingly, this rule also applies to commercial buildings converted into residential ones.
Basically, you can think of a commercial building converted into a residential building as a newly completed residential building, which implies zero rate VAT on the first leases.
The zero-rating time frame starts from the day of conversion, provided the building had not been used for residential purposes in the past 5 years.
Leases shorter than 6 months
If you lease an apartment to a tenant for less than 6 months (where the lease is not an extension), you’ll have to charge VAT if you’ve registered for VAT or are due for registration. Leases shorter than 6 months are considered real-estate-related services.
Chapter 4: How to calculate VAT for commercial properties
First, let’s clarify what can be considered a commercial property from a taxation point of view.
Essentially, a commercial property is anything that is NOT one of the following:
- A residential property (this is pretty obvious)
- A building used by a charity or for any relevant charitable purpose and
- Bare land
So, if as a property owner you are leasing a tower to companies and retailers to set up their offices and stores, your tower becomes a commercial property.
You must know by now that sale and lease of commercial property attract VAT – standard VAT rate of 5% is applicable on all commercial real estate transactions.
How does that affect you as a landlord?
If payments are made in installments, VAT is applicable on each installment
This also means you can recover all expenses paid to maintain the property.
For example, a mall developer will incur different operational expenses such as electricity, maintenance, and security. They can recover the VAT paid on such expenses as the input VAT went into providing commercial goods.
Chapter 5: Decoding VAT on supplies between landlords and tenants
Now that you understand the VAT rules applicable to residential and commercial properties, let’s review a typical relationship between landlords and their tenants. Then, we will look at very common scenarios that would affect the transactions between them.
Generally, a tenant and a landlord enter into an agreement for the tenant to use the landlord’s property for a predetermined amount and for a specified duration.
Now, if you as a landlord lease residential property, you will charge 0% VAT or no VAT at all, depending on whether the transaction (based on the age of the building) satisfies the “first supply within the first three years” condition or not.
However, if you are leasing a commercial property, then you will charge the tenant the standard 5% VAT rate.
Typically, this is how VAT is calculated on leases and agreements between tenants and landlords. However, there could be some exceptions.
A few exceptions you should know about:
Sometimes, the landlord may offer rent-free lease to a tenant to facilitate the lease of the property. For example, a landlord may offer apartments two months rent free to new tenants. The two-month-free period has no bearing on VAT calculation.
Sometimes a landlord may want to terminate a lease and offer a tenant a certain amount for termination. For taxation purposes, this amount will be considered a service provided by the tenant to the landlord. And like all real-estate-related services, it will be subject to the standard 5% VAT rate.
In this case, the tenant will have to raise a tax invoice reflecting the VAT rate on the incentive amount.
Lease variation (amendments)
If any modification or variation is made to the lease, including decrease and increase of rent, the monetary difference will be taxable.
For instance, if, as a landlord you were able to negotiate an increase or decrease in the rent of your property, then the difference is taxable.
Landlord’s contribution toward tenant’s costs
It’s common practice that the landlord of a mall may pay for the fit outs of a particular tenant’s space to encourage them to lease (for branding, foot traffic, or any other strategic purposes).
In this case, if the tenant doesn’t have a contractual obligation to give anything in return, then the transaction is not taxable. However, if the tenant is obligated to give away a good or a service of value, then it will attract VAT as a taxable supply from the tenant to the landlord.
For example, if a mall developer pays an “anchor” tenant like a well known department store to set up shop, then the tenant is providing goods and services to the landlord and the transaction will attract VAT.
Chapter 6: All about VAT on mixed use real estate developments
So what exactly are mixed use developments?
Essentially, any property that has both residential and commercial units is considered a mixed use development.
For example, if a building has retail shops on the ground floor, offices in a couple of floors in the middle, and residential units in the rest of the building, it will be considered a mixed use development.
Why should you care about mixed use developments?
There are several reasons why you should be concerned about this from the VAT point of view.
First, apply the correct rate for each transaction. You should simply be concerned because each unit will attract a different rate:
Residential units could be exempt from VAT or should be charged 0% VAT (depending on whether it is the first supply within the first 3 years of completion.) Commercial units, on the other hand, should always account for the standard 5% rate.
In fact, you need to tag each unit as residential or commercial and charge VAT accordingly.
Second, you need to determine the rate if you sell the whole building. if you sell the building in its entirety in the future, you’ll be required to allot the sale amount according to the classification of each unit (commercial, zero-rated residential, or exempt residential) and apply taxes based on the tagging.
Now, the final point is trickiest: how do you claim paid VAT on expenses you paid?
But hold on, and we’ll try to explain.
If you want to recover the VAT on the operational cost of the building, then you’ll have to allocate the VAT based on the classification of each unit. This means you can only claim back VAT on the units that attract at least 0% or the standard 5%.
Essentially, VAT paid on expenses for exempt units (for instance, residential spaces beyond the first supply) cannot be claimed back. We will elaborate on the apportionment issue in a future blog.
Chapter 7: Real estate and registering for VAT
With so many conditions to fulfill, you must be wondering whether you need to register for VAT if you’re in the real estate business.
You can now stop deliberating and easily determine whether you need to register for VAT depending on the following scenarios.
VAT Registration is not required
Registration is off the cards for you if all your real estate supplies are in the residential sector and exempt from VAT.
For instance, if you only own residential properties (like a villa complex) and they’re older than 3 years, you don’t need to register for VAT.
Are you wondering why?
Well, basically, to register for VAT, your total revenue from the sale and lease of zero and standard-rated real estate must exceed AED 375,000 for a 12-month period. VAT exempt supplies are not part of threshold calculation.
VAT Registration is required
You will have to mandatorily register for VAT if the revenue from your commercial properties and zero-rated residential properties exceed AED 375,000 for a 12-month period.
This is a very common occurrence as most real estate owners own mixed-use units: commercial retail units on the ground floor with residential units on the other floors.
If you own mixed units, you must register with the FTA for VAT and collect VAT on the commercial units (provided your turnover is more than 375,000). You can also recover the VAT paid on expenses for maintaining the commercial and zero-rated residential units.
VAT registration is optional
What if you calculate your revenue from commercial properties and zero-rated residential properties over a 12-month period and find that it doesn’t reach the AED 375,000 threshold but is more than AED 187,500?
In this case you would fall into the “voluntary registration” category. You are not required to register but you can register if you want to.
But why would you want to do that?
Well, there are a couple of good reasons.
First, if you are currently paying VAT to your suppliers to serve your commercial or zero-rated properties, then you can claim that VAT. But you cannot claim it unless you register.
Another reason to register is to ease your way into VAT compliance if you think you will cross the registration threshold in the near future. Voluntary registration would allow you to get familiar with VAT compliance without the pressure of mandatory registration and penalties.
Getting a VAT registration waiver
You can request the FTA to exempt you from VAT registration if you only make zero-rated residential supplies. (The FTA calls it registration exception)
This would be applicable if you started renting the units of a recently completed residential building or started selling units from a recently completed villa complex.
Now, when you’re granted the exception, you don’t have to file for VAT. However, if you don’t register, you’ll not be able to claim back any of the VAT paid on expenses such as maintenance or security.
Yes, VAT with respect to real estate can be tricky, especially when you’re navigating the different exceptions and conditions. However, once you know the relevant sections of this guide like the back of your hand, your work as a business man or real estate owner is significantly simplified from the VAT registration and filing perspective.
And if you found this guide useful, please share widely to help close the information gap with respect to VAT and real estate.
Lastly, if you have any questions, feel free to post in the comments – we’ll try our best to respond to your queries in detail or address them in a future post. Stay tuned!