The UAE’s commercial property market has surged, prompting nuanced VAT regulations. The government strategically applies VAT to services and goods associated with commercial properties rather than the properties themselves. While VAT may not affect the sale price of a property, it could apply to services or items included in the transaction, like furniture or buildings. Understanding these VAT principles is crucial for insightful discussions with your tax advisor about VAT on commercial property in UAE.
What is VAT?
The value added tax is a 5% standard tax applied as VAT on commercial property in the UAE. All owners of such property, servicer to such property, developers
should pay VAT. Justifiably, VAT varies between 0-5 % and no VAT systems. It is critical to clarify the category of property that falls under “commercial property” in the UAE.
What is a commercial property?
In the United Arab Emirates (UAE), commercial property generally refers to real estate for business activities. Here’s a basic table outlining types of properties commonly considered commercial in the UAE:
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|Type of Commercial Property
|Buildings or spaces used for office purposes, including headquarters, branch offices, and administrative centres.
|Properties used for retail business, such as shops, malls, showrooms, and retail outlets.
|Large spaces used for storage, distribution, or manufacturing purposes. Often located in industrial areas.
|Hotels and Resorts
|Properties used in the hospitality industry to provide accommodations, dining, and leisure activities to guests.
|Restaurants and Cafes
|Spaces specifically designed for dining businesses, including fast food, fine dining, and casual eateries.
|Villas used for business purposes, often converted into offices, clinics, or small schools.
|Properties used for manufacturing or heavy industrial purposes, often including factories.
|Buildings used for medical purposes, such as clinics, hospitals, and diagnostic centres.
|Structures used for educational purposes, including schools, colleges, and training centres.
|Properties combining two or more uses, such as retail, office, and residential in one location.
For all the above, VAT on Commercial property in UAE , VAT on commercial property rent in UAE, VAT on retail property sale applies. However, residential properties, barren land, and specific special-purpose real estate are considered non-commercial properties in the UAE. Here’s a table with a general view of such properties:
|Type of Non-Commercial Property
|Includes houses, apartments, villas, and townhouses used for living purposes.
|Land used for farming, cultivation, or other agricultural activities.
|Properties used for government offices, public services, or state-related activities.
|Buildings or spaces used for cultural purposes, such as museums, theaters, and galleries.
|Structures designated for religious activities, like mosques, churches, and temples.
|Properties used for leisure and recreational activities, such as parks, sports complexes, and clubs.
|Non-commercial educational facilities like public schools and universities.
|Public hospitals and clinics not operated as commercial entities.
|Includes roads, bridges, public transportation facilities, and utilities.
|Land or properties designated for environmental conservation or historic preservation.
The different kinds of VATs:
In the UAE, Value Added Tax (VAT) is implemented on goods and services at different rates. For buyers and tenants, the VAT component is a cost above the base price or rent, while for sellers and landlords, it is a liability they must pass on to the FTA. Here’s how they differ concerning commercial properties:
5% VAT on Commercial Property in UAE:
Unless categorised otherwise, the standard VAT rate is 5% and applies to most goods and services. When it comes to commercial properties, the sale and lease of commercial property are subject to this standard VAT rate. When a commercial property is sold, the seller is responsible for charging and collecting VAT at the standard rate of 5%. The seller must then pay this VAT to the UAE Federal Tax Authority (FTA). The buyers will pay the purchase price of the property plus the additional 5% VAT. The VAT is due at the time of sale and is typically part of the transaction’s closing costs.
If a commercial property is sold for AED 2,000,000, the seller would add AED 100,000 as VAT on the commercial property sale in UAE, making the total sale price AED 2,100,000. The buyer pays this VAT as part of the transaction, and the seller remits it to the FTA.
VAT on Commercial Property Rent in UAE:
Tenants of commercial properties are required to pay VAT on the rent. The landlord, who is the lessor of the commercial property, collects VAT at the standard rate of 5% on top of the rent. The landlord is then obligated to remit this VAT to the
FTA. The VAT payment is typically made as part of the periodic rental payments
– for example, monthly or quarterly, depending on the rental agreement. This rate is levied on the total rent value, including all associated costs, such as service charges, maintenance fees, and other additional expenses outlined in the lease agreement. For tenants, this means an extra 5% burden on their rental expenses. However, businesses registered for VAT can recover the VAT paid on their rent, reducing their overall tax liability.
When a business leases office space for AED 100,000, they will pay AED 5,000 as VAT on commercial property rent in UAE, making the total rent AED 105,000. The landlord collects this VAT and delivers it to the FTA.
0% VAT on Residential Property in UAE:
A 0% VAT rate means that the goods or services are taxable, but the rate is zero. It’s applied to specific goods and services, like certain educational services, preventive and primary healthcare services, and international transportation of goods and passengers.
VAT on residential property in UAE such as newly constructed residential properties are often subject to 0% VAT for the first three years. However, as of now, this does not typically apply to commercial property.
No VAT on Residential Property Sale in UAE:
No VAT or VAT-exempt means the goods or services are not subject to VAT at all. Specific financial services, residential properties (other than the first supply of new residential buildings), bare land, and local passenger transport are examples of exempt supplies.
For residential property sale in UAE, the first supply of new properties within three years of completion is zero-rated, but subsequent sales are exempt supplies. However, if a commercial property is considered bare land, it could be exempt from VAT.
If a commercial property sale includes furnishings or equipment, the VAT would be applied to these items, not the sale price. This distinction is crucial for buyers and sellers to understand to avoid unexpected VAT-related costs.
A long story cut short:
- VAT on commercial property in UAE: Standard-rated at 5% for most commercial property transactions.
- VAT on commercial property rent in UAE: Generally standard-rated at 5%, unless specific exemptions or zero-ratings apply.
- VAT on commercial property sale in UAE: Standard-rated at 5% for sales, but the first supply of new buildings (residential) may be zero-rated, and bare land sales may be exempt.
Understanding Protocol for VAT on Commercial Properties in UAE:
Adherence to these protocols supports the fair and efficient operation of the tax system, which funds public services and infrastructure. The protocols are specific and necessary. Following the Protocol will avoid unnecessary errors in submitting your VAT and ensures that businesses can operate without risking fines or legal consequences arising from non-compliance.
Registration with FTA for VAT on Commercial Properties in UAE:
Registration can be done on the e-services portal of the FTA website. The registration is of two distinct forms:
- Mandatory VAT Registration:
- Businesses with taxable supplies and imports that have exceeded AED 375,000 over the past 12 months or are projected to do so within the next 30 days must register for VAT.
- International businesses providing taxable goods or services within the UAE may qualify for exemptions.
2. Voluntary VAT Registration:
Optional registration is available for businesses whose taxable supplies and imports or expenses have exceeded AED 187,500 in the last 12 months or are anticipated to exceed this threshold in the coming 30 days.
Cancellation of VAT on Commercial Property Rent in UAE:
When a commercial property lease agreement is terminated, the provider should issue a refund and a tax credit note to the lessee. However, if any amount is retained as a compensation fee for services rendered, it’s subject to the standard 5% VAT.
Unique Payment Process for VAT on Commercial Property Sale in UAE:
Before finalising property ownership transfer, purchasers must remit VAT directly to the FTA. This ensures that no duplication in VAT payment occurs.
VAT Treatment for Capital assets :
Capital assets are Commercial buildings exceeding AED 5 million. In such transactions, the buyer is liable to pay 5% VAT to the vendor. The purchaser must track the asset’s use over ten years to make necessary VAT recovery adjustments. Tracking will prevent any usage changes that may impact VAT entitlement.
Deregistration of VAT for Commercial Entities:
Entities can deregister or remove their registration for VAT on commercial property in UAE if they find their taxable supplies or expenses fall below the voluntary registration threshold of AED 187,500 over 12 months. They can also deregister if the total taxable supplies made were less than AED 375,000 for the previous year. After ensuring payment of all taxes, deregistration applications must be filed within 20 business days.
The VAT Compliance Checklist: A Quick Summary
VAT compliance is foremost a legal requirement. Hence, VAT voids legal penalties, ensures financial accuracy and maintains your company’s reputation. Thus, it helps your business stay competitive and financially healthy.
1. VAT Registration: Ensure your business is registered for VAT with the FTA.
2. Accurate Calculation: Calculate VAT on rent or additional services accurately, following the standard 5% rate.
3. Proper Documentation: Maintain meticulous records of all transactions, invoices, and receipts.
4. Timely Filing: Submit timely VAT returns and pay any VAT liabilities promptly.
5. VAT Recovery: If eligible, claim VAT recovery on your expenses
Challenges and Considerations: For VAT on commercial property in UAE
While VAT on commercial property in UAE transactions is a well-defined process in the UAE, there are specific challenges and considerations to keep in mind:
- Registration Threshold: Businesses must be aware of the VAT registration threshold. If their annual turnover exceeds this threshold of AED 375,000, they are obligated to register for VAT.
- Mixed-Use Properties: For properties used for both residential and commercial purposes, the VAT treatment can be complex. It’s crucial to seek professional advice to determine the correct VAT application.
- Contractual Agreements: To avoid disputes, landlords and tenants must specify VAT responsibilities in their lease agreements.
- Compliance: Proper record-keeping and timely submission of VAT returns are essential to comply with UAE tax regulations.
- Disclosure of errors: any VAT return errors, even a minute error, must be voluntarily disclosed to the Federal Tax Authority (FTA).
VAT on commercial property in the UAE applies if the activity qualifies as a Taxable Supply during business. If you’re actively trading or leasing as a business, VAT likely pertains to you. Conversely, earning from property as a passive investment may not fall under the VAT umbrella.
The determination of VAT obligations is nuanced and dependent on the individual facts of each case. For clarity and compliance assurance, professional guidance is invaluable. At Nair and Nelliyatt, our team manages these complexities, assisting clients with VAT registration and planning. We simplify to help in understanding when transactions constitute a business activity liable for VAT. Contact us to ensure your VAT responsibilities are managed effectively and efficiently.