The long-awaited UAE VAT legislation, namely Federal Decree Law (8) of 2017 (the VAT Law) is finally out and everyone can at last be properly informed about the impact of VAT on their everyday lives, as well as all the various industry sectors that will be affected thereby.
In the normal course of the application of VAT, the construction and supply of commercial, industrial and retail properties, in addition to the construction of infrastructure, is treated as subject to VAT at standard rate of 5%.
However, certain sections of the real estate sector will be exempt from VAT, as follows:
• Bare, or unimproved land will be exempt from VAT.
• First time supply of residential properties by developers within three years of completion, for both rental or purchase will be zero rated.
• First time residential property renters will not pay VAT on the lease amount.
• First time residential property purchasers will not pay VAT on the purchase price.
On the other hand:
• VAT will be payable at the standard rate of 5% on all commercial properties, both for rental and purchase, with variations for different scenarios.
• Service charges, cleaning services and utility charges will attract the standard VAT 5% rate.
From a developer’s standpoint, VAT will certainly impact the price of construction projects, since goods and services related to construction are taxable, so large scale developers are more likely to feel a pinch, unlike the consumers, that will not be subjected to VAT as first-time buyers or renters, which means that there won’t be any significant changes in the patterns of consumer’s behavior.
“On buildings that have not been finished or are only three years old, the first sale will be zero-rated. So, your deposit and completion payment will not be subject to VAT,” says Justin Whitehouse, Middle East indirect tax leader at Deloitte.
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 amount will be used as reinvestment in infrastructure and domestic projects, which will subsequently draw more people towards UAE, and will lastly benefit the real estate market.
Key Facts of Real Estate VAT:
Photo courtesy: Federal Tax Authority UAE
Here are some frequent questions that business owners have when it comes to VAT in the UAE:
1. Who should register for VAT?
A business must register for VAT if their taxable supplies and imports exceed the mandatory registration threshold of AED 375,000.
Furthermore, a business may choose to register for VAT voluntarily if their supplies and imports are less than the mandatory registration threshold, but exceed the voluntary registration threshold of AED 187,500.
Similarly, a business may register voluntarily if their expenses exceed the voluntary registration threshold. This latter opportunity to register voluntarily is designed to enable start-up businesses with no turnover to register for VAT.
2. What are the responsibilities of a business related to VAT?
All businesses in the UAE will need to record their financial transactions and ensure that their financial records are accurate and up to date. Businesses that meet the minimum annual turnover requirement (as evidenced by their financial records) will be required to register for VAT. Businesses that do not think that they should be VAT registered should maintain their financial records in any event, in case the financial institution needs to establish whether they should be registered.
3. When are businesses supposed to start registering for VAT?
VAT will come into force on 1st of January 2018. Any business that is required to be registered for VAT and charge VAT from 1st of January 2018 must be registered prior to that date.
To enable businesses to prepare for introduction of VAT and comply with this registration obligation in time, the electronic registrations will be open for VAT from the third quarter of 2017 on a voluntary basis and a compulsory basis from the final quarter of 2017 for those that choose not to register earlier. This will ensure that there is no last-minute rush from businesses to register for VAT before the deadline.
4. When are registered businesses required to file VAT returns?
Taxpayers must file VAT returns with the FTA on a regular basis (quarterly or for a shorter period, should the FTA decide so) within 28 days from the end of the tax period in accordance with the procedures specified in the VAT legislation. The Tax returns shall be filed online using eServices.
5. What kind of records are businesses required to maintain?
Businesses will be required to keep records which will enable the Federal Tax Authority to identify the details of the business activities and review transactions. The specifics regarding the documents which will be required and the time period for keeping them will be stated in the relevant legislation.
6. How long must a taxable person retain VAT invoices for?
Any taxable person must retain VAT invoices issued and received for a minimum of 5 years.
7. What sectors will be zero rated?
VAT will be charged at 0% in respect of the following main categories of supplies:
· Exports of goods and services to outside the GCC;
· International transportation, and related supplies;
· Supplies of certain sea, air and land means of transportation (such as aircrafts and ships);
· Certain investment grade precious metals (e.g. gold, silver, of 99% purity);
· Newly constructed residential properties, that are supplied for the first time within 3 years of their construction;
· Supply of certain education services, and supply of relevant goods and services;
· Supply of certain Healthcare services, and supply of relevant goods and services.
8. What sectors will be exempt?
The following categories of supplies will be exempt from VAT:
· The supply of some financial services (clarified in VAT legislation);
· Residential properties;
· Bare land; and
· Local passenger transport
9. How will the real estate be affected?
The VAT treatment of real estate will depend on whether it is a commercial or residential property. Supplies (including sales or leases) of commercial properties will be taxable at the standard VAT rate (i.e 5%). On the other hand, supplies of residential properties will generally be exempt from VAT. This will ensure that VAT would not constitute an irrecoverable cost to persons who buy their own properties. In order to ensure that real estate developers can recover VAT on construction of residential properties, the first supply of residential properties within 3 years from their completion will be zero-rated.
10. What are the cases that would lead to the imposition of penalties?
Penalties will be imposed for non-compliance.
Examples of actions and omissions that may give raise to penalties include:
· A person failing to register when required to do so;
· A person failing to submit a tax return or make a payment within the required period;
· A person failing to keep the records required under the issued tax legislation;
· Tax evasion offences where a person performs a deliberate act or omission with the intention of violating the provisions of the issued tax legislation.
Source: Ministry of Finance
Certain goods and services will be exempt of VAT in 2018:
Exports of goods and services.
International transport of goods and passengers.
Certain means of transport, such as trains, trams, vessels, airplanes.
First sale/rent of residential buildings.
Aircraft or vessels designated for rescue and assistance by air or sea.
Certain investment precious metals.
Certain healthcare services and related goods and services.
Certain educational services and related goods and services.