The Value Added Tax (VAT) in UAE has significant impacts on commercial property transactions since its implementation on January 1, 2018. This indirect tax, set at a standard rate of 5%, plays a crucial role in diversifying the UAE’s revenue sources while maintaining a relatively low tax rate compared to global standards. VAT in the UAE, shedding light on its application to commercial property transactions, service charges, development and construction, input VAT recovery, exemptions, and the importance of compliance and record-keeping.
NOW Consultant, an expert firm in VAT on commercial properties, assists businesses in VAT Registration, ensuring efficient record-keeping, and maximizing their financial decisions to thrive in this dynamic market of commercial properties in UAE.
Importance of VAT in UAE:
A country’s public sector manages the economy and social initiatives, funded by taxes from individuals and businesses. The taxes have two types: direct and indirect. VAT lies in the indirect taxes category, and contributes a good share in the annual tax ratio of UAE. The government collects direct taxes, while registered businesses handle indirect taxes according to FTA guidelines. In UAE, a type of indirect tax known as Value Added Tax (VAT) features a standard rate of 5%, that diversifies revenue sources for the UAE.
VAT on Commercial Property in UAE:
Commercial property transactions, whether through sale or lease, are subject to a 5pc VAT rate based on the consideration received. This VAT is applicable even when payments are made in installments.
Types of Commercial Properties Subject to VAT
1. Commercial properties include rented or sold office spaces, retail outlets, hotels, serviced apartments and any properties explicitly designated as commercial rather than residential.
2. If the property owner offers free incentives, VAT will be charged.
3. Any movable property and resources not attached to the ground is considered commercial.
Categories of Applying VAT on Commercial Property in UAE :
When it comes to VAT on Commercial Property in UAE implications, there are two main avenues to consider: the supply of goods and services. Within this context are two important VAT classifications that individuals involved in this market should acquaint themselves with before making investments: “zero-rated” and “exempt.” In cases labeled as “exempt,” VAT does not play a role. On the other hand, when something is categorized as “zero-rated,” VAT can be applied and reclaimed.
Property owners must conduct VAT calculations for situations involving both exempt and taxable supplies, enabling them to recover VAT associated with taxable supplies at rates of 0% and 5%.
- Only the taxpayer can ask for a VAT refund.
- Apply for a refund on the Federal Tax Authority’s website.
- If you qualify, approval takes about 20 days, and you’ll get the refund within 5 days.
- To be eligible, you need a registered business under VAT, show VAT invoices, and claim within 6 months of the purchase.
Who Can Collect VAT on Commercial Property in UAE
The government levies direct taxes on individuals’ earnings collected directly from them. Conversely, indirect taxes are gathered via intermediaries who act as agents for the government’s tax collection. In that scenario, registered businesses play a pivotal role in collecting and examining VAT on Commercial Property in UAE payments made by customers, effectively bolstering government revenue. The Federal Tax Authority (FTA) supervises and enforces the VAT audits, and guarantees tax collection in the UAE
Fundamentals of VAT on Commercial Property in UAE:
Knowing the basics of VAT is important for UAE commercial property deals.
1. Value Added Tax (VAT) on Commercial Property Transactions in UAE
a. Sales: A standard VAT rate of 5% applies when it comes to commercial properties in UAE. This tax is applicable whether you’re buying a newly constructed property or a resale of an existing one. As an example, when acquiring a commercial property valued at AED 1 million, a VAT payment of AED 50,000 is obligatory, constituting 5% of the overall purchase price.
b. Leases:Renting commercial properties in UAE is also within the scope of VAT. Generally, VAT is computed depending on the entire rental sum. For instance, if the annual rent for a retail space amounts to AED 200,000, the VAT due would be AED 10,000 (equivalent to 5% of AED 200,000).
2. Taxation for Services Related to Commercial Property
Numerous business establishments within the UAE, notably those situated in commercial towers and structures, include fees for upkeep, security, and communal services. VAT also apply on service charges of above. Both property owners and tenants are responsible for settling VAT on these service charges, thereby introducing an extra expense to the overall occupancy costs.
3. VAT on Development and Construction of Commercial Property in UAE
For those engaged in developing or constructing commercial property in UAE, it is important to comprehend the VAT principles. VAT is applicable at the standard rate of 5% to provide construction services and sell building materials. Therefore, developers should incorporate these VAT expenses into their project planning considerations.
4. Input VAT Recovery
An important factor for commercial property owners is the potential for input VAT reclamation. Enterprises involved in selling or leasing commercial properties often have the opportunity to reclaim the VAT they’ve disbursed for expenses linked to those properties. This encompasses VAT paid on construction, refurbishment, and upkeep costs. The ability to reclaim input VAT can notably impact the total VAT liability in a commercial property deal.
5. Exemptions of VAT
Although the standard VAT rate is relevant for most commercial property transactions, it’s crucial to be aware of specific exemptions and special situations:
a. VAT on Residential Property in UAE: Property sales and leases are typically exempt from VAT for six months. Remember, this exemption doesn’t cover commercial property deals.
b. Undeveloped Land: In general, transactions involving undeveloped land, characterized by the absence of any infrastructure, are typically exempt from VAT. Yet, VAT may become relevant when the land is designated for commercial development, particularly in connection with subsequent construction and development activities.
c. Mixed-Use Developments: The VAT treatment in mixed-use development situations can fluctuate depending on property classification and the development’s intended purpose.
d. Financial Services: Certain financial services linked to commercial property deals, like mortgage lending and insurance, are exempted from VAT.
6. Compliance and Record-keeping
Ensuring strict compliance with VAT regulations is crucial to prevent incurring penalties. To safeguard against potential liabilities, individuals involved in commercial property transactions, whether as buyers or sellers, should diligently maintain comprehensive records. These records encompass a spectrum of documents such as invoices, contracts, and other pertinent paperwork like bookkeeping and accounting. This documentation holds immense significance for VAT reporting and prospective audits, ensuring that VAT-related tasks are executed efficiently. Failure to maintain accurate transaction records can result in substantial penalties imposed by the authorities. According to local laws, a company is mandated to preserve its books of account for a period of five years.
VAT Payment on Selling of Commercial Property in UAE:
When selling a commercial property in UAE by a non-developer supplier, there’s a specific 5% VAT process. The seller issues a tax invoice, but the buyer must pay the VAT directly to the Federal Tax Authority (FTA) before completing the property transfer. They can also use an FTA-designated bank if available in the Emirate.
Follow the below steps:
- The buyer receives a Payment Transaction Number.
- The buyer keeps the proof of payment, detailing the VAT payment (if paid through a bank).
- The Payment Transaction Number or proof of payment (if relevant) is presented to the Land Department for the ownership transfer.
- The supplier reports the property’s output tax within their regular VAT return as per standard procedure.
NOW Consultant, Expert VAT on Commercial Property in UAE
NOW Consultant helps businesses in VAT on commercial property in UAE in all scenarios. The expert team at NOW Consultant excels in various VAT services, such as VAT calculations and VAT audits. They we also provide assistance with VAT registration and de-registration procedures. Additionally, their expertise extends to efficient VAT return filings and expert guidance in matters related to VAT reconsideration for commercial properties. Consult with our team to get tax compliance and ensure efficient working on Value Added Tax.