Dubai has introduced VAT since January, 2018. Does this affect prices, and how is VAT levied on the off-plan units purchased before December, 2017, which are still under construction?
Developers in Dubai aren’t chrarging property buyers extra value added tax-related costs yet, though contractors have already started passing on VAT-related costs to developers in the UAE.
For residential properties, the primary market purchase (directly from the developer), if the off-plan property is still being built and during 3 years time period after completion, is not subject to VAT, according to the law.
Thus, developers cannot pass the VAT on to buyers. But still, VAT is, actually, a consumer-targeted tax, and it could be possibly passed on Dubai property buyers in other cases too, except for those mentioned above, if the law will be amended in future. So far, developers weren's inclined to raise off-plan property prices, and are absorbing the VAT-related costs (for construction materials, architects and designers, etc.) at the expense of their own profits, so as not to scare buyers away.
However, there still is some uncertainty about the properties acquired from the developer before December, 2017, which are still under construction. According to the current legislation, for such projects, VAT will be imposed only on the outstanding balance (after December 2017 inclusive) of the value of such units. However, even this balance tax burden in most cases is still being carried by developers.
Actually, it is even likely that more and more developers will absorb VAT, especially in the off-plan space.
“In the current market conditions, real estate buyers won’t accept any substantial VAT-related price increase. That’s why many developers decide to absorb the definite increase in cost. In this scenario, it will be from the developer's margin that such cost will be paid for ongoing projects. But for all future projects, cost estimates will, probably, include a VAT component in order to avoid an impact on the bottom line," reckons Atif Rahman, director and partner at Danube Properties.
Today, buyers incentives provided by off-plan developers include prolonged post-handover payment plans, return guarantees, absorption of VAT and transfer fees, as well as even buy-back offers. VAT waivers/absorption, for short-term promotions, can be one of the ways to stimulate and lure buyers. But, in the end, it all depends on the availability, marketing strategy and, most importantly, the customer's interest in a certain project.
About what is the ‘zero rated’ VAT and ‘exempt supply’ VAT, and how you can recover VAT-costs paid for commercial real estate units, read our
And for how the VAT introduction affects the Dubai property market