VAT in real estate
As the 5 per cent GGC-wide value-added tax (VAT) comes into force in the UAE next year, its impact on residential property transactions is likely to be minimal, although commercial real estate transactions may attract VAT.
“We don’t expect VAT to be raised on sales of properties. The DLD’s transfer fee is already a kind of tax, a bit like the stamp duty in the UK,” says Mario Volpi, chief sales officer of Kensington Exclusive Properties, referring to an amount equivalent to 4 per cent of the property value already being collected by the Dubai Land Department (DLD) for each real estate transaction.
Furthermore, a guide on VAT for property transactions is not yet available, notes lawyers from Hadef & Partners. The UAE VAT Law could be issued by mid this year, with further regulations later in the year, according to Ashraf Sayed and Michael Lunjevich, who are partners at the law firm.
While investors are now weighing the impact of a new tax regime, industry insiders are hopeful the VAT will not affect property demand negatively. “It might hurt the already depressed market,” says Sailesh Jatania, CEO of Gemini Property Developers. “Although full details about the VAT implementation are still being awaited, we do not think that property sales and rental would attract VAT, as it is generally not applied on immovable asset sales.”
Residential property transactions, whether lease or sale, are known to be exempt from VAT, according to Hadef & Partners. “In some jurisdictions, the first sale of residential property is usually exempt or is ‘zero rated’ with subsequent sales being ‘exempt supply’ for the purpose of VAT,” according to Sayed and Lunjevich.
“It is anticipated the UAE will adopt a similar approach as the real estate sector forms a major part of the UAE economy, and this may avoid any negative impact generally.”
Zero-rated goods are items that are VAT taxable, but the actual tax charged is zero. For property, developers would still have to report the sale on their VAT returns.
“It would appear that VAT on residential is completely waived, although there is no guarantee, as the regulations haven’t yet been published,” says Andrew Thomson, partner at law firm Gowling WLG. “But for now they are saying zero-rated for off-plan and exempt for secondary sales, and residential rents are also protected or VAT exempt.”
He adds: “The reason, I guess, that they are not attaching VAT to off-plan is because they could potentially damage developers and the market on the residential side.”
Residential rents and sales may be exempt from VAT, however, this does not mean that property owners, tenants, buyers and sellers won’t come across it. Services provided by maintenance companies, real estate agencies and even law firms will be most certainly affected.
“Any service related to real estate should attract VAT, so your maintenance fees may go up,” Thomson cautions. “Those of us operating in the real estate business just have to rethink the way we approach property transactions and services with VAT. Do we cut our rates by five per cent to make up for the difference? It is going to be a learning curve.”
Anyone using a brokerage to buy, sell, rent, lease out or manage a property will see the VAT on their bills.
“VAT is likely to apply to the services provided by agencies selling property,” Volpi says.
On the agency side, this could raise issues in terms of commission sharing, as the brokerage would bear the VAT, while it would still pay the full commission to agents, according to Hadef & Partners.
But Ala’a Masoud, head of marketing at Schon Properties, says it may be too early to bring brokerage commission into the VAT system.
“It might, if at all, be in future tax reforms,” says Masoud, who is also not convinced that real estate would attract any form of VAT for now. “At the moment, we are not sure if property will come under the VAT scheme as most GCC states might not be ready to bring real estate under the VAT regime. Also, there is no such indication from the authorities.
“In Dubai, there is already a four per cent fee on purchase transaction. People are paying five per cent on rental fees already. Any new tax on property will hurt developers and buyers.”
Nonetheless, as Sayed and Lunjevich point out, the general consensus is that commercial property is more than likely to attract VAT, in addition to existing DLD transfer fees.
“Commercial leases, offices and probably hospitality units wouldn’t escape VAT, opening up the possibility for landlords seeking to pass VAT onto their tenants, resulting in an increase in rent,” the Hadef lawyers say, adding that developers could resort to fitting out a property, which is traditionally done by tenants, to make their offerings more commercially competitive.
Thomson also believes commercial rents would be affected by VAT, just like in Europe. “We imagine it will be five per cent on top of rents of warehouses, offices, retail, etc, and potentially could affect sales of commercial property as well,” says Thomson, adding that it is best for potential buyers and sellers to seek legal advice. “It will take some time to get used to VAT. For us lawyers, the introduction is not that surprising, but it does mean that people doing commercial deals would ideally have to involve lawyers to get contracts right. That’s going to be the biggest change from our perspective, as not everyone these days uses lawyers for property transactions.”
A sign of sophistication
Thomson says buyers can potentially offset VAT, but it will “require everyone to think more sophisticated and professional. It will make the region and the UAE a more mature, modern, developed economy, rather than rely on oil and fees, which isn’t sustainable in the long term”.
Ultimately, he believes VAT will not seriously affect real estate. “Most countries charge much higher fees for property registration, etc. The VAT is not going to hurt the market.”
Jatania concurs the VAT is a natural progression in the GCC’s economic development. “For businesses, it will be crucial to adjust to the new mentality, although VAT will start from a low base, so it will not hurt consumers much.”
Real estate development
The construction industry, with myriads of materials and services involved, would attract VAT. In addition, Hadef & Partners points out that VAT may not be equally applied to sales of undeveloped property, developed commercial property and residential property, with bare land often being exempt, and mixed-use developments requiring more complex VAT management.
“It is possible that VAT recovery for residential development is likely to be blocked, as are business inputs into the leasing of residential property,” says Lunjevich. “Where the sale or lease of residential property is exempt for VAT, it could hit the pocket of the landlord or developer.”