VAT Implication for Commercial Properties in the UAE
Value Added Tax has been introduced in the UAE with effect from 01 January 2018. Value Added Tax (VAT) is a consumption-based tax that is applicable for goods and services sold, used, and enjoyed in the UAE. Services/supplies related to real estate assets are subject to VAT depending on the type of property, the type of transaction, etc. Let us have a deep understanding of VAT applicability for commercial properties in the UAE.
Before jumping into the VAT implications for commercial properties in the UAE, let us understand the definition of commercial properties. In simple words, commercial properties are those that are not considered residential properties for VAT purposes, bare land, and buildings that are intended solely for charity purposes.
Residential properties are, generally, properties used for residential purposes without any additional services attached (for example: serviced apartments are not considered residential properties), which are given for a long-term rental contract (generally more than 6 months). Supplies related to residential properties are exempted from UAE VAT except for the first supply of residential properties within 3 years from the date of completion of construction.
A few examples of commercial properties:
- Offices
- Hotels
- Shops
- Warehouse
VAT Rates for Commercial Property Transactions in UAE
Below are a couple of examples of commercial property transactions in the UAE.
- Lease of commercial property
- Sale of commercial property
- Sale of commercial property to a VAT-registered person where the current lease qualifies as a business of transfer
Commercial property transactions are subject to UAE VAT at the standard rate, which is 5%.
Who should register for VAT when dealing with commercial property transactions?
VAT registration is mandatory for both natural persons (individuals) and juridical persons (companies) who are engaged in the transactions of commercial properties in the UAE.
The threshold for registering for VAT in UAE
A taxable person shall apply and obtain the TRN at the time of exceeding the mandatory registration threshold of AED 375,000/- in the previous 12 months or expected to be crossed in the coming 30 days. In case of delay in registration, it can be attracted with administrative penalties and interest on VAT liability, as applicable. The taxable person can register for VAT voluntarily as well when the threshold has exceeded AED 187,500/- in the previous 12 months or is expected to be crossed in the coming 30 days.
VAT Collection and payment to FTA
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Lease of commercial property: The owner registers and collects VAT from a tenant and pays to the Federal Tax Authority. The owner can recover VAT paid on expenses related to the commercial property renting business.
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Sales of commercial property by a developer: the developer registers and collects VAT from the buyer and pays to the Federal Tax Authority.
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Sales of commercial property by a non-developer: The seller issues a tax invoice to the buyer; the buyer pays the VAT amount to the Federal Tax Authority and submits the payment confirmation to the Land Department to complete the ownership transaction.
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Sale of commercial property to a VAT-registered person where the current lease qualifies as a business of transfer: No VAT applicable, subject to conditions
Related Services of Commercial Property
Below are a few examples of services related to commercial property in the UAE.
- Maintenance of buildings
- Owners associations and other related services
- Electricity, water, gas, cooling
- Real estate agent fees
All these related services are subject to VAT at a standard rate of 5%. The VAT paid on such expenses can be considered under input VAT credit.
Capital Asset Scheme of Commercial Properties
A capital asset is a single item of expenditure for the business that has a value equal to or more than 5 million dirhams. The VAT paid on such expenditure shall be considered in the Capital Asset Scheme under UAE VAT Law.
Under the Capital Asset Scheme, real estate assets have an estimated useful life of 10 years or more, whereas assets other than real estate have 5 years. The VAT paid on expenses of assets under the Capital Asset Scheme can be recovered in the immediate VAT filing. During the life of the asset, if the assets are used for non-business purposes or for making exempt supplies, the VAT-claimed portion of such supplies will be considered ineligible, and such portion shall be reversed.
To learn more about VAT on Commercial Properties in UAE, 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.