What does VAT mean for the UAE's property seekers?

Everyone with a roof over their head wants to know how the revised VAT law will impact property sales in the UAE.

Since Propertyfinder Group relies on our data and prior performance to provide market insight, even we are thinking, prepare as much as you can, but then we will have to "wait and see".

It is possible, however, to make some inferences for how a brand-new tax will affect sales. Based on what's exempt, the five per cent value-added tax on property transactions is expected to impact only large-scale investors and those buying and renting commercial properties in the UAE.

Meanwhile, residential deals, including rentals, will remain tax exempt, and therefore should not be affected.

That's good news for home-buyers. All residential housing, both for first-time buying and for buy-to-rent, will be subject to VAT at zero per cent.

Residential renters will escape taxation because residential leases are exempt from VAT, and therefore they would not be allowed to add VAT to rent. But landlords may lose out on other expenses they incur with VAT, making rental prices vulnerable to an uptick.

From a developer's standpoint, VAT will certainly impact the price of construction contracts, since goods and services related to construction are taxable. Since Dubai developers have been ramping up launches of their off-plan projects in the last six months, it's imperative that they lock down processes so they are prepared to recoup potential losses under the new tax system.

As the sale and purchase of newly constructed real estate is likely to be zero rated (that is, reported on a tax return but taxed at a zero per cent rate), investors in residential property will not be required to pay VAT to the developer or a subsequent seller.

However, investors are likely to have to pay VAT to providers of leasing or management services relating to the property and will not be entitled to recover this VAT. Therefore, large-scale investors and developers are likely to feel a pinch. In addition, developers' documentation should be sure to clarify that VAT will be payable by investors otherwise they'll be on the hook. Commercial tenants will be required to pay VAT. For most commercial tenants, this will not be a material issue as they will be able to offset this VAT against VAT that they are collecting on their supplies used for construction.

The initial, first sale of new homes will be taxed at a rate of zero per cent. This means property developers will be able to claim back any VAT they had to pay from the government. Residential tenants' leases will be exempt from VAT, but commercial tenants - those in offices, shops, etc - can expect to pay VAT at the standard rate of five per cent. Also, sales of commercial property will be subject to VAT at the standard rate of five per cent.

In addition, commercial developers and property buyers may want to consider the one-off costs of setting up shop as a taxpayer. This may include new software and staff training to ensure compliance and reduce the risk of penalties from a VAT audit.

The exciting news for everyone in the UAE is that VAT could generate Dh12 billion in its first year and Dh20 billion in its second year, according to Sultan bin Saeed Al Mansouri, UAE Minister of Economy. This may be reinvested in domestic infrastructure projects that draws more people to the UAE and attracts more end users to the real estate market.

The writer is finance director at propertyfinder.ae. Views expressed are her own and do not reflect the newspaper's policy.

Source: Khaleej Times