Impact of VAT on UAE Real Estate Sector

From 1st January 2018, VAT will be levied on the consumption of goods and services in UAE. Businesses, end-users, and individuals are unhappy with the introduction of VAT in UAE. The rough idea has appeared about the VAT framework, sectors, zero- rated goods that will be exempted from the tax. Ultimately consumers and end- users have incurred all taxes, so they must be aware that devil lies in the details.

Real-estate is one of the sectors which impacts all expatriates and citizens in UAE in the form of house rents and prices, we will tell you how VAT will impact UAE property.

According to Khaleejtimes, It is clear that commercial property (sales and leases) will be levied with VAT at the standard rate of 5 per cent whereas residential property will be exempted from the VAT. Exceptions of property in UAE, On the sale of new residential property VAT will charge at zero rate of VAT whereas bare land will be exempted from VAT.

 Sellers, landlords and developers of the property must have to pay VAT at the standard rate of 5 per cent while doing property transactions. Additionally, VAT will be charged on the normal selling price or rent, so that developer, landlord and seller will not suffer a cost [except cash flow] from the introduction of VAT. From the introduction of VAT, the cost of buying or selling commercial property will increase. Buyer or tenant must register under the VAT and is likely to recollect the VAT charged, [which will be the case the majority of time], the burden of tax on the property must not create an additional cost [except cash flow].

Letting or selling all property in UAE including retail outlets will be levied VAT at the standard rate of 5 per cent. However, after the introduction of VAT in UAE will increase the price of commercial property in the transactions of buying or leasing property.

 Implementation of VAT totally depends on the seller’s or landlord’s decision to take up the VAT as a cost in their business or passing it to buyer’s or tenants. Later, the buyer or seller is capable of recovering the VAT on their purchase.

In the views of Trade, “Businesses such as financial institutions and banks are unlikely able to recover VAT fully on the purchase of property, however prices of property (in the case of buying or selling) in UAE increases resulting burden of VAT, will be a direct cost for them”.

Valuation and prices of commercial property price are likely to increase. The commercial and retail sector is likely to be more expensive by five percent in the case of rental pricing. However, there may be an effect on the prices and valuation may be increased by two to five percent. All this is an assumption before the introduction of VAT. Of course, we are waiting to see the exact impact in the property.

The rent prices of commercial property totally depend on the mutual understanding between landlord or tenant whether the tenant wants to pay VAT+ Rent price on the property or not. If in case the tenant is ready to pay rent+ VAT prices on the property, it automatically increases the price of the property.

Rent agreement and sales contracts in the case of existing property, the payment clause will be reassessed to understand whether the landlord/ seller have the capacity to pay/ charge pay VAT that has already been agreed.

On the resale, residential property is likely to be exempted from VAT. This promotes activity in the secondary market. Experts or higher authorities are waiting for the tax implementation in UAE as it will generate more revenue in UAE budget shortage and fund infrastructure projects.

However, after the implementation of VAT, it automatically increases the property prices in UAE. There is a positive impact of this, it can help in albeit marginally, the boom- bust cycles and ease, which can be hugely disruptive.