According to the UAE Ministry of Finance, the UAE Federal and Emirate governments provide citizens and residents with many different public services – including hospitals, roads, public schools, parks, waste control, and police services. These services are paid for from the government budgets. VAT will provide the UAE with a new source of income which will contribute to the continued provision of high quality public services into the future. It will also help the government move towards its vision of reducing dependence on oil and other hydrocarbons as a source of revenue.

The UAE VAT (value-added tax) legislation (Federal Decree Law (8) of 2017) will take effect on 1 January 2018. There will be repercussions across the real estate industry particularly with lease agreements and property purchases as they are considered to be a ‘taxable supply’ in terms of the VAT Law. This will increase in the costs of renting or owning property, so this must be factored into the equation.

There are different VAT regulations between leasing and purchasing residential and commercial properties. In addition to VAT-exempt purchases, there are two VAT rates that will both will appear on invoices: zero-rated, and standard rated. Zero-rated is charged at zero percent. Standard rates will be charged at 5%.

At a glance:

• Bare, or unimproved land will be exempt from VAT
• First time supply of residential properties by developers within three years of completion, for both rental or purchase will be zero rated
• First time residential property renters will not pay VAT on the lease amount
• First time residential property purchasers will not pay VAT on the purchase price
• VAT will be payable at the standard rate of 5% on all commercial properties, both for rental and purchase, with variations for different scenarios
• Service charges, cleaning services and utility charges will attract the standard VAT 5% rate

“It remains to be seen what contractors will do with their VAT charges in preparing for a project,” said Mohammad Shafi, CEO of Prescott, the developer of a new project in Meydan. “Already, contractors are sending out letters stating clearly that all prices mentioned are subject to revision in a post-VAT situation. “This is what creates a certain lack of clarity on what property prices could be eventually.”

Residential off-plan sales have been VAT exempted, but future inflation in construction costs could be reflected in sales prices.

For more detailed information including how the new VAT affects business, tourists and more, visit the UAE Ministry of Finance.

See also:

Cluttons reports Dubai market corrections set to stabilise for residential rent and purchase prices

Dubai reveals top 10 nationalities that invested AED151 billion in real estate

Cityscape Global 2017 off-plan unit sales triple in one year