The VAT challenge How UAE residents and property investors are dealing with the new tax regime

VAT is expected to bring in more transparency and regularisation in the real estate market.

While the new value-added tax (VAT) does not directly affect residential property, the housing market will definitely feel the effects of the new tax regime. From the outset, the increase in prices of goods and services in the UAE will take its toll on the purchasing power of residents, which will of course impact their budget on housing.

“Major expenditures such as housing rental, education and healthcare services are either zero rated or exempt from VAT,” Mayank Sawhney, director at MaxGrowth Consulting, tells PW. “All these comprise around 60 per cent of total household expenses. So in essence, the VAT should have resulted in an inflation of 2 per cent.”

Mayank Sawhney, director, MaxGrowth Consulting

However, retailers have not just increased prices based on VAT; many have built in much higher margins in their prices since January, according to Sawhney, bringing actual inflation closer to 4 per cent.

“Most retailers are passing on the costs to the customers, so the costs have gone up,” says Shiraz Khan, senior tax advisor at Al Tamimi & Company.

Inflation is forecast to be between 2 per cent and 4 per cent this year

Wholesalers and retailers are also going to be affected and, therefore, this segment will have a new financial burden. “Commercial properties are subject to VAT and all shopkeepers and retailers will have to pay the implementation costs of the tax,” says Muhammad Sohaib, senior accountant at Al Yousuf Real Estate. Such costs include training expenses and software purchases, as well as hiring of VAT accountants.

Muhammad Sohaib, senior accountant, Al Yousuf Real Estate

“For high-net-worth individuals, this will not make much of a difference,” notes Sawhney. “But for lower and mid-income people, especially when their salaries or business income is not increasing, even a 4 per cent increase in cost of living will have an effect on their spending.”

A recent survey by finance comparison site Yallacompare found that almost half of UAE residents (44.6 per cent) are worried they will not be able to afford the increase cost of living brought about by the country’s implementation of VAT. However, the survey, which was conducted in December and polled nearly 200 UAE residents, found that more than 62 per cent expect a salary raise this year.

“There is no big effect as the VAT is only on commercial property at the moment,” Laura Adams, managing director of Carlton Real Estate, tells PW. “We have seen no change in the market since it was introduced.”

Laura Adams, managing director, Carlton Real Estate 

Moreover, VAT is only chargeable on agent commission and compared with the VAT rates of many other countries, 5 per cent is relatively low, adds Adams.

“I believe the problem we have at the moment is pricing,” says Adams. “Tenants and buyers just cannot afford the going rents so are sharing, which is leaving a number of units vacant in the rental market.”

There are around 60,140 apartments, 9,822 villas, 3,456 town houses and 7,5457 commercial units that are scheduled to be completed in Dubai this year, data from Propertymonitor shows. In comparison, only 14,514 apartments were completed last year, along with 6,015 villas, 1,898 town houses and 691 commercial units.

Based on these figures, the market will see a 250 per cent increase in handovers this year as opposed to 2017, a huge increase that some fear could lead to an oversupply. With that in mind, those looking to sell or lease their properties need to be reasonable with their expected prices, says Adams.

Investor mindset

Analysts agree the UAE has one of the cheapest VAT rates globally. According to Adams, the UK applies a VAT rate of 20 per cent, Russia 18 per cent, Australia 10 per cent and China 17 per cent. Similarly, Khan points out that in Europe, the average VAT rate is over 20 per cent, and in Africa it is around 15 per cent. The global average of VAT or similar tax is around 19 per cent.

How the UAE's VAT compares with other countries

Even recently introduced VAT schemes in other countries are higher than the UAE’s. Malaysia introduced a 6 per cent goods and sales tax (GST) in April 2015, while India’s GST that came into effect last year is the highest in the world at 28 per cent, more than Hungary’s 27 per cent.

“VAT is an investment-neutral tax, unlike corporate tax for example. Corporate tax is a tax on the profits of companies operating or doing business here, and this is what really affects direct investments,” Khan explains. “VAT is not supposed to be a cost to businesses.

“If you’re operating businesses here, you’re collecting tax on behalf of the government. You act as an agent for the government. It shouldn’t be a cost to you. You’re supposed to pass it on to the customers by collecting it from them for the government.”

Shiraz Khan, senior tax advisor at Al Tamimi & Company

While Dubai has long been positioned as a tax-free haven, this is no longer the case with the introduction of VAT. However, on the flipside, the UAE is moving in the right direction in terms of building trust with investors. The UAE, along with seven other countries, was removed from the European Union’s list of uncooperative tax havens in January, giving the country credit for further enhancing transparency in tax procedures.

To strengthen ties with EU partners, the UAE signed 113 additional agreements to avoid double taxation and eight more to facilitate the exchange information for tax purposes. The country also took measures to comply with the Common Reporting Standard and to ensure a transparent flow of information with international partners, including the EU.

“Media reports about Dubai being a ‘tax-free haven’ were related to the UAE not being prepared to give information for international assessors,” explains Sawhney. “That was a problem for the EU. Now the UAE has agreed to provide the necessary disclosures required and, as a result, the EU has withdrawn the country from the list — it has nothing to do with the VAT.”

In the long term, VAT is expected to positively influence the real estate market, bringing in more transparency and regularisation and increasing its appeal to foreign investors.

“The VAT will help in regularising a lot of processes in the UAE, which were not in line with international standards, because there was no proper system of maintaining books of accounts,” says Sawhney. “Now with every transaction you have to maintain proper documentation and disclose where the money came from — that will bring a lot of transparency to the sector.”

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No VAT on donations, grants, sponsorships in some cases: FTA

Federal Tax Authority clarifies no VAT on cases when no benefit is received in return

Abu Dhabi: The Federal Tax Authority (FTA) has clarified that donations, grants and sponsorships are outside the scope of Value Added Tax (VAT) only when no benefit is received in return.

Any benefit in return for such payments will be subject to VAT, the authority said.

The authority had issued a new clarification on VAT treatment for donations, grants and sponsorships through its ‘Public Clarifications’ service available on the FTA’s official website to familiarise taxpayers with the technicalities and procedures surrounding the tax system.

In a statement issued today, the FTA asserted that the terms “donation”, “sponsorship” and “grant” by themselves will not determine the VAT for such payments, urging businesses to consider all facts and circumstances before arriving at a conclusion.

FTA Director-General, Khalid Ali Al Bustani, affirmed that the UAE tax system placed great emphasis on encouraging charity work and social contributions with an accurate set of principles that facilitate philanthropy, including donations and grants, as per local legislation.

The authority pointed out that Article (1) of the Federal Decree-Law No (8) of 2017 on VAT defines consideration as, “All that is received or expected to be received for the supply of Goods or Services, whether in money or other acceptable forms of payment.”

The FTA added that a taxable person may receive payments in the nature of donations, grants and sponsorships from third parties including, but not limited to, employees, customers, and suppliers, among others, and further explained that to determine whether such payments are subject to VAT, the taxable person must determine whether these payments can be treated as consideration against “taxable supplies” or not.

The authority went on to clarify that VAT implications arise only when there is an underlying taxable supply. Despite the fact that the definition of “consideration” is wide and includes within its ambit all that is received or expected to be received in money or other acceptable forms of payment, VAT is only applicable when the payment relates to a taxable supply. Therefore, whether the donor, grantor or sponsor has received any kind of benefit in the form of supply needs to be determined. For VAT to be applicable, this benefit must have a close link to the payment.

What about sponsorships?

The FTA reiterated that if a donation is given without any express or implied benefit, it is outside the scope of VAT. The donation must be unconditional and unrestricted for such a treatment to apply, it added, citing, as an example, that if a business donates money to a hospital and in return the hospital provides space to the business to display and market its products, then the donation will be treated as consideration against the taxable supply of providing space for undertaking marketing activities, and will be subject to VAT.

Sponsorships are generally subject to VAT, as the person who gets sponsorships makes supplies to the sponsor, the authority explained. For example, if a business pledges a certain amount of money to sponsor a football match on the condition that the organiser displays the company’s logo at the entrance of the stadium, then the business is receiving a benefit in return for the sponsorship, and the sponsorship will be subject to VAT.

The FTA concluded by explaining that just as with donations and sponsorships, determining the VAT treatment in the case of grants requires establishing whether the grantor has received any benefit in return for giving the grant. For example, where a person gives a grant to a university for undertaking research such that the findings of the research will be used in the business of the grantor, the grant will be subject to VAT.: The Federal Tax Authority (FTA) has clarified that donations, grants and sponsorships are outside the scope of Value Added Tax (VAT) only when no benefit is received in return.

Any benefit in return for such payments will be subject to VAT, the authority said.

The authority had issued a new clarification on VAT treatment for donations, grants and sponsorships through its ‘Public Clarifications’ service available on the FTA’s official website to familiarise taxpayers with the technicalities and procedures surrounding the tax system.

In a statement issued today, the FTA asserted that the terms “donation”, “sponsorship” and “grant” by themselves will not determine the VAT for such payments, urging businesses to consider all facts and circumstances before arriving at a conclusion.

FTA Director-General, Khalid Ali Al Bustani, affirmed that the UAE tax system placed great emphasis on encouraging charity work and social contributions with an accurate set of principles that facilitate philanthropy, including donations and grants, as per local legislation

The authority pointed out that Article (1) of the Federal Decree-Law No (8) of 2017 on VAT defines consideration as, “All that is received or expected to be received for the supply of Goods or Services, whether in money or other acceptable forms of payment.”

The FTA added that a taxable person may receive payments in the nature of donations, grants and sponsorships from third parties including, but not limited to, employees, customers, and suppliers, among others, and further explained that to determine whether such payments are subject to VAT, the taxable person must determine whether these payments can be treated as consideration against “taxable supplies” or not.

The authority went on to clarify that VAT implications arise only when there is an underlying taxable supply. Despite the fact that the definition of “consideration” is wide and includes within its ambit all that is received or expected to be received in money or other acceptable forms of payment, VAT is only applicable when the payment relates to a taxable supply. Therefore, whether the donor, grantor or sponsor has received any kind of benefit in the form of supply needs to be determined. For VAT to be applicable, this benefit must have a close link to the payment.

What about sponsorships?

The FTA reiterated that if a donation is given without any express or implied benefit, it is outside the scope of VAT. The donation must be unconditional and unrestricted for such a treatment to apply, it added, citing, as an example, that if a business donates money to a hospital and in return the hospital provides space to the business to display and market its products, then the donation will be treated as consideration against the taxable supply of providing space for undertaking marketing activities, and will be subject to VAT.

Sponsorships are generally subject to VAT, as the person who gets sponsorships makes supplies to the sponsor, the authority explained. For example, if a business pledges a certain amount of money to sponsor a football match on the condition that the organiser displays the company’s logo at the entrance of the stadium, then the business is receiving a benefit in return for the sponsorship, and the sponsorship will be subject to VAT.

The FTA concluded by explaining that just as with donations and sponsorships, determining the VAT treatment in the case of grants requires establishing whether the grantor has received any benefit in return for giving the grant. For example, where a person gives a grant to a university for undertaking research such that the findings of the research will be used in the business of the grantor, the grant will be subject to VAT.

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UAE's FTA unveils plans to regulate shisha tobacco products, ensure excise taxes are paid

Shisha tobacco products will be tax marked this year to allow for electronic tracking

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Dubai: Tobacco products used in shisha will soon bear tax marks later this year, as the UAE government expands coverage of excise tax.

The Federal Tax Authority (

FTA) said on Sunday it will launch phase two of the “Marking Tobacco and Tobacco Products Scheme” starting from the fourth quarter of 2019, expanding it to cover tobacco products used in shisha, be they imported or produced and distributed locally.

The scheme is already in force on cigarettes, allowing for electronically tracking them from production and until they reach the end consumer, in order to ensure full compliance with Excise Tax laws on tobacco and tobacco products, according to the FTA. The scheme intends to combat tax evasion and manipulation, they added.

The scheme’s first phase came into effect on January 1, 2019, covering all types of imported and domestically produced and distributed cigarettes.

The digital marks were made available to producers and importers of all kinds of cigarettes to place on cigarette packs before they leave the factory to local markets, which allows them to ensure due Excise Tax has been paid.

As of May 1, 2019, the import of any type of cigarettes into the UAE not bearing the digital marks will be prohibited; meanwhile, the sale of cigarettes packs not bearing the marks will be prohibited across UAE markets as of August 2019.