VAT for property transactions is likely to make a negligible difference in terms of buyer interest
As from January 1. 2018, the UAE is seeing value-added tax (VAT) levied on property transactions across the emirates, including Dubai. VAT has been set at 5 per cent, which is among the lowest rates in the world, with some countries such as the UK and Spain charging more than 20 per cent.
Despite VAT in the UAE being levied at only 5 per cent, its introduction could raise concerns among some property investors and homebuyers alike. Chances are that this tax will potentially become a cash flow issue with funds moving from one account to another, i.e. VAT paid will be compensated with VAT charged. Having to pay more for property related purchases also has the potential to adversely affect sentiment in the market in general.
The introduction of VAT for property transactions in Dubai is likely to make a negligible difference in terms of buyer interest. Five per cent remains one of the lowest rates for VAT in the world and because it is usually charged by one side and claimed back by the other, there's not likely to be much impact overall.
It is important to know that there are two types of charge. The VAT charged on supplies which include services by a registered company such as a lawyer or accountant (outputs) and the levy paid to suppliers for them to produce these goods and services (inputs). With VAT, these inputs and outputs should level each other out, but sometimes it is not possible to charge VAT in both cases for that to happen.
These goods and services can attract either zero rating or can be exempt from VAT. A zero-rated tax means that zero per cent is charged for goods and services produced or sold (output) while any levy paid on production costs on inputs can be recovered.
What levy is chargeable
The first supply of residential properties is zero-rated within three years from completion. This means that developers can recover VAT on construction of residential properties, including the architectural design, consulting, contracting and materials used.
Residential real estate
The secondary or resale home market will be exempt from VAT at the point of sale but buyers will be subject to pay the tax on commissions and other government fees relating to these purchases. Individuals will have to pay VAT on Dubai real estate only in terms of lease management services or other management services relating to their property.
Commercial real estate
Commercial property buyers will have to pay VAT on Dubai real estate on both off-plan and secondary market units. If the commercial property is acquired for the purpose of further leasing to commercial tenants, the cost of the VAT paid when buying, for example, a retail unit, a warehouse or office, can be reclaimed when charging the levy for tenants. These tenants who are charged VAT from the landlord in addition to the rent will be able to recover the VAT from their commercial activities when charging the levy for goods and services.
The owner of any commercial property in Dubai is now required to register for VAT if the value of the supplies over the preceding 12 months was more than Dh375,000 or it is expected that they will exceed Dh375,000 in the next 30 days.
Do homeowners have to register for VAT?
There is no requirement for owners of residential properties to register for VAT unless they have any other business activities in the emirate that are taxable. VAT in Dubai will work in a very similar way to how it does in other countries, where private individuals are not subject to the tax unless they are self-employed or a business owner generating a certain level of revenue in the emirate.
The issue of VAT generally becomes a matter of cash flow. There is no reason for it to impact the value of real estate units or property prices negatively. Ultimately, although VAT becomes another factor to consider when buying property in Dubai, its impact is widely expected to be minimal in terms of adding additional costs to real estate transactions.
The writer is managing partner at Premier Estates. Views expressed are her own and do not reflect our policies.
Source: Khaleej Times
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