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Introduction of VAT in Dubai: how it will affect real estate market?

06.06.2017
Introduction of VAT in Dubai: how it will affect real estate market?

Value-added tax and the property market. Who will pay the tax, and whether prices will grow?

Dubai plans to introduce value-added tax (VAT) since 2018, in order to bring the region's economy in line with world standards. VAT in the UAE is expected to be one of the world’s lowest, or, more specifically, almost tokenistic — about 3-5%, while in other countries this tax can reach up to 20% of the goods/service value.

However, the prospect of VAT introduction still raises some concern among businessmen, investors and real estate buyers in the UAE, for after the tax being charged, its value will be included into the unit’s cost. Will the introduction of VAT affect the value of real estate units and property prices at the Dubai property market? Running ahead, we can say that it’s more than unlikely. It will be more of a cash flow issue with funds flowing from one account to another, with VAT paid compensated with VAT charged.

Regarding VAT, there are two types of levy: VAT charged on supplies (services, manufactured products) made (outputs) by a registered entity, and the VAT paid to suppliers (inputs) in order to produce these goods, services, etc. As a result, inputs and outputs should level each other, but it is not always possible to charge VAT in both cases.

Besides, there are goods/services, ‘exempt’ from VAT, and goods/services with ‘zero rated’ VAT. In case of ‘zero rated’ VAT, a zero percent tax is charged for goods or services produced or sold (output), while any VAT paid on inputs (i.e. production costs etc.) can be recovered. And in case of ‘exempt supply’ VAT can’t be charged for outputs, while the provider/seller will have to pay VAT for its inputs. Now, let’s find out, which categories different types of Dubai real estate units belong to.

First of all, it should be emphasized that VAT will hardly have any effect on residential real estate sector in any way. When buying a primary off-plan home, you won’t have to pay VAT to the developer, while the developer will be able to claim back any input VAT paid to its suppliers in the course of developing the project. Thus, primary property transactions will be classified as belonging to a ‘zero rated’ VAT category. The secondary real estate sector will also be exempt from VAT on sale, but investors may have to pay VAT for lease management services or for any other management service.

Unlike residential, commercial property buyers will have to pay VAT on both primary and secondary property units, but if the unit is acquired for the purpose of further leasing to commercial tenants, the cost of VAT paid when buying a store, a warehouse or an office can be reclaimed when charging VAT for tenants. Similarly, tenants of such commercial units forced to pay VAT to the owner of the premises plus to rent will be able to recover these costs from their commercial activities when charging VAT for goods and services provided. Thus, the issue of VAT again becomes more a matter of cash flow, which, however, is expected to revive the economy of the UAE.

Exempt or zero rated?

Zero rated

  • Exports outside of the GCC
  • International transportation and related supplies
  • First sale of newly constructed residential property
  • Education
  • Health care

Exempt

  • Some financial services
  • Secondary sales of residential property
  • Sale and purchase of bare land
  • Local passenger services

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