The UAE Ministry of Finance has officially released a statement indicating that the UAE will be implementing VAT on January 1st, 2018.
There has been some information made available to the public concerning this VAT, especially regarding the real estate sector, however some ambiguity still lingers and will only be made more clear as we get closer to the 1st of January.
What matters now is that the VAT effect on construction, real estate development, the sale and purchase and the leasing of property will be varied and is likely to be highly complex, so it is important to keep as informed as possible on what information is available to us at this time.
Below there will be highlighted some key issues that are likely to arise in the real estate sector in the UAE.
What is VAT?
First, to understand how the introduction of VAT will affect the market in Dubai, it is important to define what it actually is. VAT is an indirect tax applied upon consumption of most goods and services and is charged by VAT-registered businesses. The way it works is that each seller, or VAT-registered business, collects the tax and pays it forward to the government, while they might also be given a return by the Government is they pay tax to their suppliers. The VAT ultimately is incurred by the end consumer.
What do we know so far?
- The standard VAT rate in the UAE will be 5%
- Mandatory registration for VAT will apply to businesses with a taxable supply of AED 375,000 and above. Businesses with a taxable supply between AED 187,500 and AED 375,000 can register on a voluntary basis.
- There are some items that will be “zero rated” and “exempt” from the VAT, however the scope of this is not clear yet. “Zero rated” will most likely include basic food items, essential medicine and some export goods. “Exempt” will likely include some healthcare and education services, sale and lease of residential property and domestic public transportation. The difference between the two terms mainly applies to the supplier or seller. “Zero Rated” means the good or service is still taxable but the rate of tax will be 0% and it still must be recorded in VAT accounts.
- The UAE VAT law is expected to be issued by mid-2017 with further regulation to be introduced by the end of 2017.
- There will be no tourist VAT refund scheme in the first year due to the low rate of tax.
VAT on sale of commercial/residential properties
The Ministry of Finance has recently announced that leasing of residential properties will not attract VAT and they are likely to be treated as “Exempt” supply, however VAT will apply on commercial leases. Therefore, it is possible that landlords will try to pass the VAT onto tenants, thereby increasing the overall rental cost.
VAT on real estate broker commission
The services of a real estate brokerage are likely to be at standard VAT. One thing that needs to be considered by brokerages is how the commission structure will be affected. In a normal circumstance, the commission received from the sale of a property is split 50-50 between the individual agent and the brokerage. It is unlikely the shared commission will allow for a VAT input refund, meaning the brokerage will need to either bear the VAT in whole (including the parts paid to the agent) or make administrative changes to not only cater for VAT registration and compliance but also how commission is shared.
VAT on construction industry
The biggest concern surrounding how VAT would affect the construction industry is that construction contract tend to be long term, lasting over a number of years, and therefore, previously signed contracts may not have catered for the implementation of a VAT. This leads to the question: who bears the burden of VAT? It is likely that the Government may be accommodating in this by enacting a “grandfathering process” which allows previously signed contracts to carry on as normal without conforming to the new tax laws.
VAT for real estate developers
The VAT treatment on real estate will differ based on a sale of undeveloped property, developed commercial property and residential property. Bare land would usually be treated as “exempt” supply, irrespective of use. It is possible that VAT recovery for residential development might be blocked, as are business inputs into the leasing of residential properties. Where the sale or lease of residential property is “Exempt” for VAT, it could hit the pocket of the landlord/developer.
Real estate developers should also consider the complexities arising from mixed developments involving commercial and residential leasing and the need to apportion VAT recovery. Whilst liability to pay VAT cannot be ultimately avoided, there are ways in which, with some forethought and planning, UAE real estate businesses can restructure or pass the cost of VAT with up or down the supply chain, so that the financial burden can be mitigated.
Source: Hadef and Partners