January 1,2018 VAT will be a reality in the UAE. The long-awaited UAE VAT legislation, namely Federal Decree Law (8) of 2017 (the VAT Law) is finally published and everyone can at last be properly informed about the impact of VAT on their everyday lives, as well as all the various industry sectors that will be affected thereby.
Here is how VAT will impact the real estate industry and, more specifically, lease agreements and property purchases.
VAT will be payable at the standard rate of 5 per cent on all commercial properties, both for rental and purchase:
This means that with effect from January 1, VAT will be payable by commercial tenants and purchasers.
If the contract does not state that the price of rent is exclusive of VAT, the landlord will have to bear the cost of the added five per cent, “If the contract says the price is exclusive of VAT, then the tenant must pay. If the contract states that the price is inclusive of VAT, then landlord must bear it. If the contract is silent, then again the landlord has to pay,” A silent contract means that it makes no mention of VAT.
The ‘first time’ supply of residential properties (by developers) within three years of completion, for both rental or purchase, will be zero-rated, while subsequent residential leases from a ‘first time’ purchaser will be exempt from VAT. The tax will, however, be payable at the standard rate on all commercial properties, both for rental and purchase. Don’t look past the fact that the associated costs relating to properties will attract VAT. These will include service charges, cleaning services and utility charges, and accordingly the associated costs of renting or owning a property will increase. This should be budgeted for in assessing the affordability of property transactions, whether for renting or for owning.