Real Estate and VAT: Key Updates for Developers and Investors
The UAE has always been a major attraction for developers and investors across the globe. The real estate industry has faced significant regulatory changes with the introduction of Value Added Tax (VAT) under the Federal Decree-Law No. 8 of 2017. The VAT implications for real estate transactions have been further clarified effective November 2024 based on the recent amendments in the Executive Regulations.
1. Application of VAT in Real Estate
Based on the type of real estate transaction the VAT application may vary. For compliance and financial planning, we have to understand the variations of real estate transactions:
Taxable Supplies:
- Lease or Sale of commercial properties.
- Provision of construction services.
- Supply of raw materials.
Exempt Supplies:
- Sale or lease of residential properties post-completion after its first sale.
- Bare land transactions.
Zero-Rated Supplies:
- The first sale of newly constructed residential properties within 3 years.
- Exports of real estate services outside the UAE.
2. Executive Regulation 2024 - Key Updates
Notable changes have been made in the Real Estate Transactions during the revision of The Executive Regulation
A. VAT implications for Mixed-Use Developments
Mixed-use developments are the properties where the developers have constructed a building with residential as well as commercial units. The VAT treatment for such properties should be apportioned as per usage to ensure accurate reporting and compliance.
Implications:
- Developers are required to determine the taxable and exempt portions.
- There should be accurate invoicing and documentation.
B. VAT implication for Long-Term Leases
The VAT treatment remains exempt for residential properties when a tenant, who has a valid UAE ID issued by the federal authority for identity and citizenship leases long-term(Over six months). This update provides more clarity to landlords and tenants.
C. VAT Input Recovery Adjustments
Within a particular time frame, the developers can claim VAT input recovery on construction expenses for zero-rated properties. This adjustment encouraged the development of residential projects.
Important Note: The VAT recovery application should be submitted within the stipulated time frame to avoid disqualification.
D. Clarification on Bare/Raw Land
As per the updated executive regulation, the transactions of land having partially completed structures have been excluded from the consideration of raw land or bare land definition in terms of UAE tax.
Recommendation: Confirmation of land classification has to be done with local authorities before purchase.
E. Simplified VAT de-registration for real estate entities
An easier process has been implemented by FTA for the de registration of real estate entities those who doesn't meet the threshold for VAT registration, for small developer this will be a reduced compliance burden.
3. Best Action Plan for Developers and Investors
➢ Conducting an Impact Assessment on VAT
It's essential to understand how VAT will affect your project hence consider engaging a Tax expert to:
➞ Identify VAT applicability of new developments as well as existing projects.
➞ Make sure the properties are correctly classified.
➢ Record keeping should be well-maintained
Taking compliance into consideration for the developers and investor record keeping plays a vital role as follows.
➔ The invoices for the construction expenses should be maintained in detail.
➔ Documents like lease agreements and contracts should be maintained.
➔ VAT for mixed-use properties should be adjusted properly.
➢ Usage of Technology
The real estate developers can invest in accounting software that can perform VAT calculations complying with the FTA regulations. The following are the features that can be included:
- AI-driven VAT apportionment.
- Instant tax reporting.
- Cloud-based document storage for audits.
➢ Appoint a Registered Tax Agent
The FTA-approved registered tax agent can help in providing valuable insights and support, in terms of:
➛ Preparation and filing of VAT returns filings as per clients filing period.
➛ During FTA audits a tax agent can represent your business instead of the owner.
➛ In case of VAT recovery the tax agent can advise optimized strategic advice.
4. Common Challenges in the VAT for real-estate transaction and How to Overcome Them
Challenge 1: Properties not categorized properly
Properties not categorized properly as taxable, exempt, or zero-rated can lead to issues in following compliance and will incur penalties.
Solution: Property classifications have to be reviewed regularly and consult with tax professionals.
Challenge 2: Delay in VAT recovery
Cash flow and project timelines can be impacted if claiming VAT input recovery is delayed.
Solution: Should implement a system to monitor deadlines and submit the claims promptly.
Challenge 3: VAT on International Real Estate Transactions
Complex VAT rules are involved when it comes to cross-border real estate transactions
Solution: Work with tax professionals who are expert in international VAT regulations
5. VAT Compliance V/S Real Estate Success
VAT compliance can result in avoiding significant penalties and reputational damage. Also, understanding and following VAT laws can:
- Enhance tax recovery.
- Improves cash flow management
- Can improve the trust between investors and stakeholders.
Conclusion
For the real estate sector in UAE, the VAT rule has been updated and made it important for developers and investors to stay compliant. Maintaining proper records and staying updated on VAT laws can help avoid issues. At Flying Colour Tax Consultant LLC, We assist real estate businesses stay updated and make them meet VAT requirements by saving taxes.
Collaborate with Flying Colour Tax Consultant LLC
Backed by our deep knowledge of UAE tax regulation and real estate transactions, we deliver:
- 360 VAT advisory services.
- Assistance in VAT registration and refunds.
- Assistance in audits and regulatory assessments.
All you need to focus on is - building and investing - Let us help you take care of your tax compliance requirement.
To learn more about How VAT Impacts Real Estate Developers and Investors?, book a free consultation with one of the Flyingcolour team advisors.
Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.