VAT and Property – How does it affect me?

Those of us living and working in Dubai have now all entered a brave new world – one where a 5% rate of VAT applies to the supply of goods and services, unless they are specifically zero-rated or exempt. But how does this tax affect those involved in real estate – those buying, selling, and renting residential and commercial property in Dubai?

Before we start, we need to understand the language of VAT. Here are some key terms:

• Residential – A building intended for occupation by individuals. Excludes anything not fixed to the ground (e.g. houseboats), hotels and serviced apartments.
• Commercial – Any building that’s not residential. So, includes offices, warehouses, hotels, serviced apartments.
• Standard rated – A 5% rate of VAT will apply.
• Zero Rated – A 0% rate of VAT will apply.
• Exempt – No VAT will apply.

Now that we understand this curious argot of the accountants, let’s look at some common areas of concern:

I am planning to rent one of my apartments out through Airbnb. Do I have to charge VAT?

If you rent a residential unit on a short term basis (less than 6 months) to a non-resident, the property is deemed to be a commercial property and so you would have to charge VAT on the rent. This is however dependent on you being registered for VAT (see below).

Do I pay VAT if I buy a commercial property?

The purchase of a commercial property, such as an office unit, is subject to standard rated VAT, so you would need to pay an additional 5% VAT on the purchase price. This is regardless of whether the unit is direct from the developer or a re-sale.

Do I pay VAT if I rent a commercial property?

The rent of a commercial property, such as an office, is subject to standard rated VAT, and so you would need to pay an additional 5% VAT on the current rental amount. This is on the assumption that the owner is registered for VAT.

What if my landlord isn’t registered for VAT?

The law states that a landlord of commercial property must register for VAT if his revenue exceeds AED 375,000 pa. This means that where you have 2 identical offices in the same building, owned by different landlords, one may be available at AED X while the other may be available at AED X plus VAT, if one has registered for VAT and the other hasn’t. So if your commercial landlord isn’t VAT registered, you don’t have to pay VAT.

Do I pay VAT if I buy a new apartment or villa from the developer?

Where a developer sells a residential unit within 3 years of its construction, then that sale shall be zero-rated. This presumes it’s the first sale of that unit. So when you buy your new home, you don’t have to pay any VAT on the transaction.

Do I pay VAT if I buy an apartment or villa from a re-seller?

Where you buy a house on the open market as a re-sale (in other words not direct from the developer), then that sale shall be exempt from VAT. So you won’t have to pay VAT on that transaction.

Do I pay VAT if I rent an apartment or villa?

The supply of a residential apartment or villa on a rental basis is generally exempt from VAT, so as a tenant you do not have to pay VAT on your rent.

Do I have to pay VAT on the broker’s fees?

Brokers’ fees are subject to VAT, regardless of whether they relate to services rendered in connection with residential or commercial property. This applies equally to rentals as to sales.

How else will I be affected by VAT on real estate related costs?

We have seen how brokers’ fee will be subject to VAT. The same applies to your DEWA bills, Etisalat or du bills, district cooling bills and service charges payable to the Owners Association. So whilst you may escape paying VAT on residential purchasing and leasing, you will be liable for VAT on all expenditure on goods and services relating to your residential (or commercial) property.

I thought Dubai was tax-free. Should I just go home?

Well, you can always go home, but depending on where you’re from you may not find yourself any better off, at least in terms of a VAT comparison. Consider the rates of VAT in other countries: Australia 10%; China 17%; Denmark 25%; Germany 19%; India up to 18%; Pakistan 17%; Philippines 12%; Russia 20%; South Africa 14%; UK 20%. Now, doesn’t that make you feel a little better about the whole thing?