How UAE’s property sector may be impacted by 5% levy

— A five per cent valueadded tax (VAT) on property transactions is expected to impact only big-ticket investors and those dealing with commercial properties in the UAE, while residential deals, including rentals, will remain tax exempt.

As a bulk of the average monthly spend by families in the UAE is for rents and other essential items including food, healthcare and education, all of which are exempted, VAT — set to be implemented in the UAE from January 1, 2018 — will pose an extra burden only for high-end investors or those shopping for luxury goods.

The UAE’s Ministry of Finance has yet to issue specific guidance in relation to VAT on residential and commercial property.

However, experience of VAT and goods and services tax systems in Singapore, Malaysia, Australia, and the UK suggests that both sale and lease of for commercial properties are taxable.

Residential properties are taxable on first sale, exempt on subsequent sale, while rental is treated as exempt.

Clare McColl, partner at KPMG Lower Gulf, said commercial rents are likely to attract VAT at five per cent, but residential rents are likely to be VAT exempt, which means the landlord is unable to add VAT on to the rent.

“However, it should be borne in mind that if this is the case, the landlord may not be entitled to recover VAT incurred on his costs which would impact on his margin and therefore price,” said McColl.

According to Finbarr Sexton, a tax expert, VAT on real estate is one of the most complex areas that governments in the region have to make a determination on. “The VAT treatment of real estate can differ between the sale of undeveloped property, developed commercial property and residential property. Additionally, the rental of commercial property may be treated differently to the rental of residential properties.”

Experts said since commercial property is normally subject to VAT, the sale and rent of commercial property could be subject to VAT. They expected the government to make a distinction between commercial and residential transactions from a VAT perspective.

VAT treatment can differ between sale of undeveloped property, developed commercial property and residential property. Rental of commercial property may be treated differently to the rental of residential properties.” Finbarr Sexton, tax expert