Implications of commercial real estate transactions under UAE VAT
Real estate development and supply of properties by way of leasing out or sale of properties is one of the prime business segments in UAE. The overall economic growth and emerging investment opportunities in the region drive the demand here for real estate properties, especially the commercial real estate. It is important to know about the VAT implications if you are involved in any kind of commercial real estate transaction to make sure that you comply with the applicable VAT rules.
What is meant by commercial real estate?
A commercial real estate is defined in the VAT guide which was issued by FTA exclusively for clarifying the VAT impacts on real estate. The term real estate includes properties that consist of land or buildings. A commercial real estate is any real estate other than the following specific type of properties.
- Residential building/ buildings
- Building intended for charitable purpose
- Bare land
It is to be noted that the intended usage of the property plays an important role in determining the VAT treatments for real estate properties.
What is the general VAT impact for supply of a commercial real estate in UAE?
When a property is recognized as a commercial real estate the general VAT rule for any taxable supply made relating to that property is application of tax at standard rate which is 5%. However, there are different scenarios which can arise in connection with the supply made of a commercial real estate, which should be analyzed to arrive at the correct VAT treatment in any case.
What are the different scenarios for supply of commercial real estate and their VAT implications?
Given below are the various situations that include supply of a commercial real estate:
- Renting out of a commercial real estate: This is a taxable supply which attracts VAT at the standard rate of 5%. Lessor has to issue a tax invoice to the lessee for the amount collected that includes rent and respective VAT. Lessor has to pay the VAT collected from lessee to FTA and properly reflect the taxable income in the VAT return. Lessee on the other hand can claim for input VAT recovery for the VAT paid over the rent as per the general input VAT recovery rules.
- Sale of a commercial real estate along with the existing tenants: This is considered as a transfer of an ongoing business and thereby considered as out of scope within the purview of UAE VAT. As such no VAT to be charged or paid in this case. Both buyer and seller have to retain the documents relating to the transfer of the property for a minimum period of 15 years.
- Developer selling a commercial real estate: This is a taxable supply which attracts VAT at the standard rate of 5%. Developer has to issue a tax invoice to the buyer for the amount collected that includes sale amount and respective VAT. Developer has to pay the VAT collected from buyer to FTA and properly reflect the taxable income in the VAT return. Buyer can then claim for input VAT recovery for the VAT paid during this sale as per the general input VAT recovery rules.
- Anyone else other than a developer selling commercial real estate: This is also a taxable supply that invokes VAT at standard rate of 5%. In this case the seller has to issue a tax invoice, however seller does not need to collect VAT amount from the buyer. Buyer has to pay the VAT amount to FTA directly by creating an account in FTA portal or pay through designated banks. Once the VAT payment is made, the proof of payment has to be submitted by the buyer with the land department to register the transfer of ownership. Also buyers can claim for input VAT recovery for the VAT paid during this sale as per the general input VAT recovery rules.
How CDA assists you in providing VAT consultation services for your real estate business?
When it comes to a real estate business, identification of underlying supply transactions and application of the correct VAT treatments are the key elements in ensuring VAT compliance. It takes expertise in VAT rules and the experience of handling multiple scenarios within the real estate sector to follow the VAT impacts properly. CDA has the experience of successfully serving various clients in real estate sector across UAE over these years, facilitating the smooth functioning of VAT functions. From the point of VAT implementation to the execution of on-going routine VAT activities, CDA offers a range of VAT consultancy services including VAT accounting, VAT audit and other compliance services. Feel free to contact us to know more on our VAT services.
This brings us to the conclusion of our discussion on the implications of commercial real estate transactions under UAE VAT. Do you have further queries on commercial real estate transactions under UAE VAT? you can contact us for a free one-hour consultation.