Time for a VAT realty check
One important thing to remember about VAT in the UAE: the first supply of residential properties within three years from their completion will be zero-rated.
Dubai - Residential property sales and leases and bare land will be exempt from new tax
With effect from January 1, 2018, valued added tax (VAT) will be a reality in the UAE. As the real estate sector affects most expat lives in the UAE, let us take a look at the implications of the new levy on this industry.
Commercial property (sales and leases) will be subject to the standard rate of VAT (five per cent), residential property (sales and leases) will be exempt from VAT, with the exception of the first sale of new residential property, which will be subject to the zero rate of VAT, and bare land will be exempt from VAT.
"From a consumer perspective, a zero-rated and exempt product mean the same thing, i.e., no VAT will be charged. However, the difference is that if a business sells or supplies zero rated goods/services, it can claim the input tax credit it has paid on its purchases. While if the business sells or supplies exempt goods/services, it cannot claim the input tax credit that it has paid. As a result, for a business that sells or supplies exempt goods/services, VAT will have to be borne by that business as a cost and cannot be passed on to the end consumer," says Rakesh Pardasani, partner at RSM, an audit and tax advisory company.
A company in the UAE that offers a zero-rated good or service needs to register with the Federal Tax Authority (FTA).
A zero-rated supply is charged to the customer at a rate of zero per cent and this needs to be stated on an invoice. Zero-rated also means that the input VAT a firm pays for its supplies - such as inventory or utilities - can be recovered from the tax authority.
"However, in case of an exempt supply, input VAT cannot be recovered. As a result, the business will have to absorb VAT costs and this may encourage increased pricing," says Danyal Tirmazi, engagement manager at Sunstream Research and Consulting.
The first supply of residential properties within three years from their completion will be zero-rated. This means that developers can recover VAT on construction of residential properties - the architectural design, consulting, contracting and materials used, for example. "As the developer will be able to recover its input VAT, he will not pass the burden to the buyer or lessor. Hence, we can expect that there will be hardly any VAT impact on residential real estate pricing," explains Atik Munshi, senior partner at Crowe Horwath UAE.
"Developers are likely to want to pass the VAT cost to the purchaser to ensure their margins do not get impacted. Therefore, VAT provisions will need to be included in legal contracts and this is likely to add to the complexity of standard sale and purchase agreements or development agreements for commercial property within the region. As a consequence, legal advice should be sought at the earliest opportunity," suggests Simon Green, partner at law firm Charles Russell Speechlys.
VAT is not a cost on new residential property. "On buildings that have not been finished or are only three years old, the first sale will be zero-rated. So, your deposit and completion payment will not be subject to VAT," says Justin Whitehouse, Middle East indirect tax leader at Deloitte.
The VAT levy is unlikely to result in a significant difference in buying patterns. Remember that the Dubai Land Department already levies a four per cent transfer fee on property transactions. "The zero rate will certainly do nothing to harm demand in a buoyant market. Reports cite that it is middle-income households who are buying, many around the Dh1 million mark. This stratum will be sensitive to price point. Not charging VAT on residential properties looks like a wise strategic decision," says Ibrahim Serafi, business head at Sunstream Research and Consulting.
Residential rents in the UAE are exempt from VAT. Landlords won't be able to recover VAT they incur, for instance, on an agent's fee, maintenance, etc. They may increase the rent to cover some of the VAT paid on input goods and services.
"Given new properties will be zero-rated, the ability of landlords to increase rents for 'used' properties will be limited as market conditions will make new premises more favourable from a VAT cost perspective. Ultimately, the market supply and demand will determine rents," remarks David Stevens, VAT implementation leader at EY.
However, the devil is in the detail. Residential rent is only exempt from VAT where the lease is longer than six months (and where the tenant has evidence of an Emirates ID). "However, the tax category is yet to be published for accommodation where additional facilities are provided - such as serviced residential apartments," reckons Serafi.
Property re-sales by non-registered sellers are not expected to attract VAT. "If the secondary market transactions are between individuals, there will be no impact of VAT as it is levied only on business transactions. An individual selling his property to another individual constitutes a one-off transaction and does not become a business. However, in case a property company buys and sells property, there may be an impact of VAT, depending on whether the property is commercial or residential," explains Pardasani.