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Intro to topic: UAE is often
been in news for its lavish and grandeur real estate properties and projects ,
but for past couple of weeks the one thing which people often talk and discuss
about is VAT (Value Added Tax). In UAE VAT is introduced on Jan 1, 2018 on the
basis of the recommendation from IMF (International Monetary Fund) to diversify
the government income and to reduce the reliance on Oil Economy. It is expected
that many countries in the GCC soon will follow UAE model and implement VAT in
the coming fiscal year.

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About the article:  VAT has been the talk of the town for
many weeks now,  be it in the news paper
or in the social media there are numerous articles is in circulation regarding
it . So at we decided to explore the implementation on VAT and its
impacts in general and also on the Real Estate sector.

And in this blog we decided to write about our studies and
findings about the VAT, which will help the readers to understand the tax
system better in the context of real estate investments in UAE.

Main content:  

What is VAT?

VAT abbreviated as Value Added Tax is a new tax regime of
UAE government and it will be start implementing at the rate of five percent (5%)
from January 1, 2018.

According to the Ministry of Finance the new Tax system will
be implemented in two phases and in first phase the companies with annual
revenue of over Dh3.75million will be brought under the system and subsequently
all the remaining companies and institutions will be brought under the system
when the second phase gets rolled out.

Implementation of VAT in UAE

since the introduction and implementation of VAT there has been many confusion
in the mind of people related to price rise and cost of living. But we believe
there is absolutely no need to panic because the government has designed the
new Tax system in such a way that it won’t affect the day to day life. And also
the rate of many products and supplies will remain the same even after the

Even though 5% VAT is implemented on many goods, supplies
and services from Electronics to entertainment to the Smart phones to Super
cars at the standard rate of five percent there many exempted categories where
the VAT is completely exempted (0%) or it’s Zero Rated.

Positive Side:

the UAE the tax for the goods and supplies is in the place of many developed
and developing nations such as USA, UK, Canada, Singapore, Australia, India etc
and it helped these countries to diversify its economy and improve the income
supplies of the government which in return will help to the growth of the
nation and its infrastructure.

And also many early tax and benefits of the economy still
remain the same which are.

Income Tax – There will be
no income tax on the salaries even in the new Tax regime.

Free Zones will function the
same way and it will continue to offer the Tax free environment including the
100% foreign ownership and their investments.

And many sectors such as
Health, Education, Social Services and many Food Items will be Exempted and
remain Tax free under the VAT.    

So from
investors point of view the market will remain the same and it will be even
more exciting in the coming days with government having additional funds
collected through VAT for the development.

Real Estate Market scenario:

After the
global recession of 2008-09 the real estate market is moved into more stable
and sustainable model and many large scale projects attracted and brought
confidence to the investors from all over the world to invest in UAE.

And also
the Government of UAE is very supportive and simplified the norms for owning
the property for foreigners in UAE is seen as a welcome move and boosted the
value of real estate projects.

And from
the year 2015 onwards once again the developers and builders with confidence
and past performance on the market started to invest in large scale projects
and it helped investors to have the variety to pick and choose their
investments based on the budget.

So the
Year 2016 & 2017 is effectively witnessed as the supply year, with abundant
supply of properties and most of those are in affordable budgets and lower in
rents which largely attracted the small and first time investors to enter the
UAE markets which will actually remain as a positive integer for the upcoming

And the
year 2018, 2019 is expected to be the same with large supplies with abundant
amount of affordable properties, and this really the time for investors to
invest in Dubai and wait and witness the market performance in the run to the
Dubai Expo 2020.

VAT in Real Estate:

From Jan
1, 2018 the VAT will be also implemented in some section of real estate
transactions and the government is generous enough the keep land and
residential properties out the tax bracket and also to provide the expense
credit to the commercial properties, which will help the price of the
properties to remain the same and market to stay as effective and interesting
as before.

To understand the VAT in Realty sector let us divide the
type of properties into 4 major classifications.

Bare land  – Just bare land and unimproved

Land – Improved land and
readily available to develop.                                                                                                                                                                                 

Residential Properties –
Properties used for residential purpose and it can be rent, lease or sale.                                 

Commercial properties –
Properties used for commercial purposes and it can be rent, lease, and sales.

Bare Land / Land

As per current Tax rates the “Bare land” is completely exempted
from the tax, whereas the “Land” which improved and readily available to
develop will attract a 5% tax.  

Residential Properties:

Fresh residential properties / first time supply of
properties is “zero rated” within the first three year of completion for both
rental and purchase. So a person who is buying or renting a property need not
to pay any VAT.

Any subsequent sale made on the residential property after
the first supply is exempted from VAT, thus no need to pay any VAT on rent and
purchase price for the buyer.                                                                                                                                                

Commercial properties:

Any commercial property will attract the standard rate of 5
per cent of VAT for both rental and purchase. But the business can claim all the
expense paid as Input Tax Credit.        

Impact of VAT on the Real Estate

Since the
land transaction is either exempted or zero rated the particular will remain
the same as it did before the Tax implementation.

In terms of residential properties the first supply is Zero
rated so that the developer can take input tax credit of all the developing
expenses from the tax department so they can pass on the benefit to the buyer
by not increasing the price of the property.

This is
very great move by the government to keep the residential properties under Zero
rated bracket so that investors won’t feel much of the difference in price
before and after the introduction of VAT.

But remember the property transaction fee of 4 per cent by
Dubai Land Department is still in place and will levied in the same manner as
they used to do earlier.

But in
terms of commercial properties every transaction will attract 5 % tax, but the
government gives out the option of reclaim the expense incurred from the while
they buy, rent and lease during their Tax filing.

business can claim the expense occurred on the Tax via Input Tax credit, it’s
expected they will pass on the benefits the market and the customers. That will
help the price of all associated goods and supplies will remain the same even
after the implementation.

And any
residential property which is used for commercial purpose such as service
apartment will also attract 5 per cent tax. And they also claim their expense
through the new Tax system.

Final thoughts:

VAT may
increase price of some goods supplies and services but the majority (90%) of it
won’t be affected because of the government policies and measures, and also the
government is very keen and cautious to maintain the same price of the products
by adding VAT inclusive of the price of the product.

And also
the Tax revenue which is collected by the government will be reinvested to boot
the economy which will help income levels of individuals to go high which will
eventually balance their expense paid on Tax.

In terms
of real estate sector government has been so calculated and futuristic to not to
affect the market of the residential properties by keeping it exempted or zero rated,
and also providing the input tax credit to the commercial property transactions
which will help the industry to remain the same with lesser or no impact and
keep the investors excited in the years to come.

If you
are looking to invest in UAE, Contact us (contact form link here).

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