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FACTS Here’s How VAT Will Affect Your UAE Rental Contract

The UAE’s implementation of value-added tax (VAT) is just weeks away. And while the UAE government has published a pretty comprehensive list of exactly which products and services will be taxed, some confusion still surrounds tax on rental contracts.

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Happily, Propertyfinder Group has shined a light on the matter. And the bottom line is that, no, you won’t have to pay VAT on your rental contract.

“The biggest confusion we are seeing in the market is the mixing up of a real estate transaction (rent or sale) with the service of a real estate broker, whereby for a commercial building both will incur a 5% VAT and for a residential building the first one will not incur any VAT as opposed to the second one (5%),” said Simon Comina, Propertyfinder’s CFO, in a statement.

Essentially, a real estate transaction (a rent or a sale) won’t have VAT levied on it if it’s a residential building. However, there will be VAT added on to the real estate broker’s fees or services.

So, for example, if you’re renting an apartment for AED 100,000, you’ll still only have to pay AED 100,000 to rent that apartment. However, the estate agent will likely charge you AED 5,000 in fees to create the rental agreement (5% of the rental price). The 5% VAT will be applied to that AED 5,000, so you’ll have to pay the estate agent AED 5,250 in total – inclusive of VAT.

And if you’re the private landlord of a residential apartment or villa, you won’t need to register for VAT.

That said, commercial property leasing is a little different. Say you’ve got an office space or a warehouse, and you want to rent it to another business, you’ll have to add 5% VAT onto the cost of the lease. And the estate agent will add 5% onto its fees as well.

Check out our comprehensive guide to VAT in the UAE here.

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Revealed: The Impact Of VAT On Dubai’s Real Estate Market

Are you a property owner? Well, here’s some good news for you. The Federal Tax Authority (FTA) and Dubai Land Department (DLD) have confirmed that the introduction of value-added tax (VAT) should have little effect on you.

The UAE tax system is designed to support the real estate sector in all its activities, the organisations said in a joint report.

They explained that the idea is to provide a suitable environment for real estate.

Indeed, for now, landlords or property owners aren’t even required to register with FTA. And the two organisations said that 85% of components in Dubai’s real estate sector are not subject to the 5% tax.

For example, here’s how the VAT rules work in relation to property in the UAE:

Bare land sales

These are exempt from VAT so long as the owner provides evidence that they are not being built on.

Residential buildings

Not taxable if they are sold or rented. This includes apartments, buildings, residential villas, housing for workers and students, accommodation for armed forces and police, homes for the elderly, orphans, and nursing homes.

Real estate transactions

This is related to residential buildings, including sales, rents, leaseholds and long-term leases, where the owner of the property will benefit from the zero rate.

Buying mixed-use buildings (residential and commercial buildings)

The residential part is exempt from tax according to its percentage of the building, while the commercial part will include tax.

Leased commercial properties

The rent and sale of commercial and industrial properties in the zones specified by the FTA are not considered a supply for VAT.

His Excellency Sultan Butti bin Mejren, Director General of Dubai Land Department, explained that, because of these rules, the vast majority of land and property owners in Dubai are largely unaffected by the introduction of VAT.

“When reviewing the details of sales, rents and other transactions, we found that the value of bare land sales, residential properties, and occupied commercial and retail properties comprise the largest percentage of total properties traded during 2017,” he said.

“This ratio is expected to remain over the coming years and even stands to increase with commercial offices continuing to improve their leasing operations and minimise empty units.”