This is first draftand hasn’t been error checked or proof read. Open for inputs and feel free toedit and highlight the changes.This is second draftand the tone and content has been changed as per your inputs and needs. Blog post title: VAT AND ITS IMPACTS IN REAL ESTATE SECTOROF UAEIntro to topic: UAE is oftenbeen 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 discussabout is VAT (Value Added Tax). In UAE VAT is introduced on Jan 1, 2018 on thebasis of the recommendation from IMF (International Monetary Fund) to diversifythe government income and to reduce the reliance on Oil Economy. It is expectedthat many countries in the GCC soon will follow UAE model and implement VAT inthe coming fiscal year.
About the article: VAT has been the talk of the town formany weeks now, be it in the news paperor in the social media there are numerous articles is in circulation regardingit . So at Anqa.ae we decided to explore the implementation on VAT and itsimpacts in general and also on the Real Estate sector.And in this blog we decided to write about our studies andfindings about the VAT, which will help the readers to understand the taxsystem 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 ofUAE 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 willbe implemented in two phases and in first phase the companies with annualrevenue of over Dh3.
75million will be brought under the system and subsequentlyall the remaining companies and institutions will be brought under the systemwhen the second phase gets rolled out. Implementation of VAT in UAEEversince the introduction and implementation of VAT there has been many confusionin the mind of people related to price rise and cost of living. But we believethere is absolutely no need to panic because the government has designed thenew Tax system in such a way that it won’t affect the day to day life. And alsothe rate of many products and supplies will remain the same even after theimplementation.Even though 5% VAT is implemented on many goods, suppliesand services from Electronics to entertainment to the Smart phones to Supercars at the standard rate of five percent there many exempted categories wherethe VAT is completely exempted (0%) or it’s Zero Rated.
Positive Side:Beforethe UAE the tax for the goods and supplies is in the place of many developedand developing nations such as USA, UK, Canada, Singapore, Australia, India etcand it helped these countries to diversify its economy and improve the incomesupplies of the government which in return will help to the growth of thenation and its infrastructure. And also many early tax and benefits of the economy stillremain the same which are.1. Income Tax – There will beno income tax on the salaries even in the new Tax regime.2. Free Zones will function thesame way and it will continue to offer the Tax free environment including the100% foreign ownership and their investments.
3. And many sectors such asHealth, Education, Social Services and many Food Items will be Exempted andremain Tax free under the VAT. So frominvestors point of view the market will remain the same and it will be evenmore exciting in the coming days with government having additional fundscollected through VAT for the development.Real Estate Market scenario:After theglobal recession of 2008-09 the real estate market is moved into more stableand sustainable model and many large scale projects attracted and broughtconfidence to the investors from all over the world to invest in UAE.
And alsothe Government of UAE is very supportive and simplified the norms for owningthe property for foreigners in UAE is seen as a welcome move and boosted thevalue of real estate projects.And fromthe year 2015 onwards once again the developers and builders with confidenceand past performance on the market started to invest in large scale projectsand it helped investors to have the variety to pick and choose theirinvestments based on the budget.So theYear 2016 & 2017 is effectively witnessed as the supply year, with abundantsupply of properties and most of those are in affordable budgets and lower inrents which largely attracted the small and first time investors to enter theUAE markets which will actually remain as a positive integer for the upcomingyears.And theyear 2018, 2019 is expected to be the same with large supplies with abundantamount of affordable properties, and this really the time for investors toinvest in Dubai and wait and witness the market performance in the run to theDubai Expo 2020. VAT in Real Estate:From Jan1, 2018 the VAT will be also implemented in some section of real estatetransactions and the government is generous enough the keep land andresidential properties out the tax bracket and also to provide the expensecredit to the commercial properties, which will help the price of theproperties to remain the same and market to stay as effective and interestingas before.
To understand the VAT in Realty sector let us divide thetype of properties into 4 major classifications. 1. Bare land – Just bare land and unimproved 2.
Land – Improved land andreadily available to develop. 3. Residential Properties -Properties used for residential purpose and it can be rent, lease or sale. 4. Commercial properties -Properties used for commercial purposes and it can be rent, lease, and sales. Bare Land / LandAs per current Tax rates the “Bare land” is completely exemptedfrom the tax, whereas the “Land” which improved and readily available todevelop will attract a 5% tax. Residential Properties:Fresh residential properties / first time supply ofproperties is “zero rated” within the first three year of completion for bothrental and purchase. So a person who is buying or renting a property need notto pay any VAT.
Any subsequent sale made on the residential property afterthe first supply is exempted from VAT, thus no need to pay any VAT on rent andpurchase price for the buyer. Commercial properties: Any commercial property will attract the standard rate of 5per cent of VAT for both rental and purchase. But the business can claim all theexpense paid as Input Tax Credit. Impact of VAT on the Real Estatesector:Since theland transaction is either exempted or zero rated the particular will remainthe same as it did before the Tax implementation.In terms of residential properties the first supply is Zerorated so that the developer can take input tax credit of all the developingexpenses from the tax department so they can pass on the benefit to the buyerby not increasing the price of the property.
This isvery great move by the government to keep the residential properties under Zerorated bracket so that investors won’t feel much of the difference in pricebefore and after the introduction of VAT.But remember the property transaction fee of 4 per cent byDubai Land Department is still in place and will levied in the same manner asthey used to do earlier.But interms of commercial properties every transaction will attract 5 % tax, but thegovernment gives out the option of reclaim the expense incurred from the whilethey buy, rent and lease during their Tax filing.
Sincebusiness can claim the expense occurred on the Tax via Input Tax credit, it’sexpected they will pass on the benefits the market and the customers. That willhelp the price of all associated goods and supplies will remain the same evenafter the implementation.And anyresidential property which is used for commercial purpose such as serviceapartment will also attract 5 per cent tax. And they also claim their expensethrough the new Tax system.
Final thoughts:VAT mayincrease price of some goods supplies and services but the majority (90%) of itwon’t be affected because of the government policies and measures, and also thegovernment is very keen and cautious to maintain the same price of the productsby adding VAT inclusive of the price of the product. And alsothe Tax revenue which is collected by the government will be reinvested to bootthe economy which will help income levels of individuals to go high which willeventually balance their expense paid on Tax.In termsof real estate sector government has been so calculated and futuristic to not toaffect the market of the residential properties by keeping it exempted or zero rated,and also providing the input tax credit to the commercial property transactionswhich will help the industry to remain the same with lesser or no impact andkeep the investors excited in the years to come. If youare looking to invest in UAE, Contact us (contact form link here).
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