With UAE getting surplus investments leading to rapid growth in its economy, the demand for real estate has shot up very fast in the last few years. In particular, commercial real estate has seen a massive demand hike in the last few years. Also, this trend shows no signs of slowing down anytime soon.
How does UAE VAT define commercial real estate?
As per the VAT guide issued by the FTA, a commercial real estate is defined as any property consisting of land or buildings other than any of the following:
- Residential Buildings
- Any Building that is intended to be used for a charitable purpose
- Bare Land or Unconstructed Land
It is pertinent to note here that the intended use of a property is a key aspect governing the impact of UAE VAT on property transactions.
The general implication of UAE VAT for all commercial real estate transactions
Any taxable supply of commercial real estate property is taxed at a standard rate of 5% as per the UAE VAT. However, there are also separate rules that decide the VAT implication in case of peculiar situations related to commercial property supply.
Some peculiar scenarios in commercial real estate transactions and their treatment under UAE VAT
- Renting out a commercial real estate property: This kind of transaction attracts a standard VAT rate of 5%. The lessor has to issue an invoice to the lessee for the rent that reflects the VAT collected. The lessor has to then properly deposit the collected VAT with the FTA and reflect the same in the VAT return. The lessee can claim input credit on the VAT paid on the rent as per the general recovery rules.
- Sale of a commercial real estate property including the occupying tenants: This is a special case of property exchange, and as per the existing laws, such a transaction is treated as a transfer of property and falls outside the ambit of the UAE VAT. This transaction would attract no tax under UAE VAT and would be properly treated in the appropriate sections of the property tax.
- Sale of commercial real estate property by the developer: This is a taxable real estate supply and attracts the standard 5% tax as per the UAE VAT. The developer will collect the VAT amount from the buyer after issuing him a proper VAT invoice inclusive of the tax amount. The developer has to deposit the VAT amount with the FTA and show the proper entry in the VAT return. The buyer will be able to claim the input VAT on the tax amount paid.
- Sale of commercial real estate property by anyone other than the developer: This again attracts a standard 5% tax under UAE VAT. However, here the buyer has to himself deposit the VAT by opening an account with the FTA on its online portal or through one of the many banks designated for the same. The buyer also has to submit the proof of payment with the land department, after which the sale would be deemed, completed, and the change of ownership will be registered. The buyer will, as usual, be able to claim a proportional input VAT credit.
Treatment of commercial real estate transactions under the UAE VAT can get quite complicated as there is an endless number of particular aspects and peculiarities to any such transaction. Suppose you are planning to buy or sell commercial real estate in the UAE. In that case, you should always engage a good professional services firm that has proven expertise in VAT compliance, VAT accounting, and VAT audit to help you complete the process smoothly.