Value Added Tax (VAT)
A value-added tax (VAT) is mainly known as a goods and services tax (GST) in some countries and is a sort of incremental tax. It is applied to the price of a product or service at every stage of manufacture, distribution, and sale to the final consumer. If the ultimate customer is a company that collects and pays VAT on its products or services to the government, it might reclaim the tax. It resembles and is frequently likened to, a sales tax.
VAT On Real Estate in The UAE
In the United Arab Emirates, the Value Added Tax (VAT) came into existence almost three years ago. Though this time period of three years is quite short to analyze the actual impact of Value Added Tax (VAT) in the field of real estate in the UAE particularly in the residential sector. Therefore, for a proper understanding of how Value Added Tax works in the world of real estate in the United Arab Emirates, one needs to understand and follow how the FDA is rating the taxable and non-taxable supplies in the real estate industry.
As per the Value Added Tax law rates, standard rated, zero-rated, and exempt are the three categories in which real estate vendors are classified. The Federal Tax Authority (FTA) generally considers bare land and existing residential property to be VAT-exempt. Commercial properties covered the land, and further supplies of charitable buildings, on the other hand, will be subject to the ordinary VAT rate of 5%.
VAT Rules on Commercial Buildings
As per FDA rules and recommendations, FDA has clearly announced that all commercial properties whether leased or sold are subjected to the Value Added Tax (VAT) on the real estate world in the United Arab Emirates, which means that the properties used for commercial zone area would be considered under the standard 5 percent VAT rate.
According to FDA, the commercial properties both sold and leased have to pass the Value Added Tax (VAT) on the real estate industry in the UAE. This means that the properties used for retail and office purposes will come under the standard 5 percent VAT rate. Therefore, It is worth noting that even a commercial building’s parking lot will be taxable. Where’s tax cannot be applied to those Parking lots that are part of residential buildings. If someone is still unsure about what is taxed in the commercial real estate sector, here’s a comprehensive real estate VAT guide in the UAE that outlines taxable products in the commercial real estate sector.
● Lease incentives
● Non-resident owners
● Hotels, Motels, and Breakfast joints
● Mobile home and other similar properties, which are not fixed to the ground
● Serviced apartments
In addition, the FTA classifies all properties as commercial buildings, with the exception of bare ground, properties erected for residential purposes, and properties established for philanthropic purposes.
VAT Rules on Residential Buildings
As per FTA rules, property or buildings that have been constructed for human residential purposes must be considered as residential property and buildings. The following are some of the properties or structures that the FTA considers to be residential properties.
- Part of a structure or building that is occupied as a person’s house or that is to be occupied by someone.
- Resting Homes and Nursing Homes
- Farm Houses on agricultural grounds
- Armed forces and police officers are housed in this facility.
The FTA will classify a residential building as a residential building if the occupant uses a tiny portion of the structure as a workstation or office space. However, it is essential to contact a reputable VAT consultancy for the best guidance. To affirm the same on commercial and residential property in the UAE.
Bare Land and VAT in the UAE Real Estate
Bare land is a piece of undeveloped land. As previously stated, the FTA exempts the supply of bare land from the UAE’s real estate industry’s Value Added Tax (VAT). The FTA expressly says that civil engineering works, partially constructed buildings, and completed building structures should not be built on bare ground.