Understanding VAT Exemptions in UAE Property Transactions

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As the newly introduced Value Added Tax (VAT) continues to make an impact on various aspects of our daily lives, it is essential to understand its implications on the UAE property market and, more importantly, the areas that fall under VAT exemptions.

Residential Property VAT in the UAE

To determine if you are expected to pay VAT on a residential property, it is important to first identify what qualifies as a residential property. According to the Federal Tax Authority (FTA), the following types of buildings are considered residential:

  • Villas, townhouses and apartments that are not serviced.
  • Housing for students and laborers.
  • Accommodation for the police and other armed forces.
  • Nursing homes, rest homes and orphanages.
  • For Property Owners Transacting on the Secondary Market

    If the property you own is purely residential and does not include any other business activities, you cannot charge VAT on the rent or sale of the property. Consequently, you are not eligible for tax returns on these transactions in the secondary or resale property market.

    However, it is important to note that this VAT exemption applies only to the rent and sale of such properties. VAT is still applicable to services such as property maintenance, upkeep, agency commission fees, owners association costs, and property management services.

  • For Tenants

    As a tenant, your rent is VAT exempt. However, you should expect to pay VAT on services such as water, electricity, gas, air conditioning, and agency fees. Government services related to property registrations also fall under VAT exemptions, so only the usual fees will be charged.

  • For Buyers

    If you are an investor or buyer concerned about how VAT will affect your purchases on the primary market, there is no need to worry about costs being passed on to you. For residential developments, VAT is not applicable to the property for the first three years from completion. This means developers can recover the VAT they are charged on aspects such as design, materials, construction, and contracting, as these costs are considered part of the developer's business expenses. It is worth noting that in the launches observed in 2018, developers have not noticeably passed on any VAT costs to buyers.

Commercial Property VAT in the UAE

When it comes to commercial properties, certain expenses associated with renting out an office or other commercial spaces can be recovered.

The FTA classifies the following as commercial properties in the UAE:

  • Serviced residences.
  • Shops.
  • Offices.
  • Warehouses.
  • Buildings used for healthcare.
  • Schools and universities.
  • Short-term leases that are six months or shorter.
  • For Property Owners

    Owners of commercial properties need to register for VAT and can charge the standard 5% VAT on the property to buyers. If owners incur expenses related to renting out a commercial property, they can recover these costs.

  • For Buyers

    Buyers have the opportunity to recover the VAT on their tax return. However, it is the buyer's responsibility to monitor the use of the building for a period of 10 years. If the building's purpose changes, any previously recovered VAT may need to be adjusted.

It is important to note that VAT applies to both the primary and secondary markets when dealing with commercial property.

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