The Federal Tax Authority (FTA) has clarified regulations pertaining to Value Added Tax (VAT) when it comes to the real estate sector, stating that the supply of commercial real estate (selling or leasing) will be subject to the basic 5% tax rate, while residential units will remain generally exempt, except for the first supply of a new residential building within the first three years of it being constructed which will be 0% rated.
Residential and Commercial Buildings
The FTA defines the supply of real estate as activities that include, among other things, the sale, lease or giving of the right to any real estate.
A residential building is a building or part thereof that is intended and designed for occupation by individuals, and mainly includes buildings that can be occupied by any person as main place of residence. This does not include any place that is not a building fixed to the ground and that can be moved without being damaged; any building that is used as a hotel, motel, bed and breakfast establishment, hospital or the like; a serviced apartment for which services in addition to the supply of accommodation are provided; and any building constructed or converted without lawful authority.
Meanwhile, a commercial building is any building or part thereof that is not a residential building. Examples include offices, warehouses, hotels, shops, etc.
Supply of Residential and Commercial Buildings
The first supply of a new residential building within the first three years of it being constructed shall be zero-rated. All subsequent supplies shall be exempt, even if within the first three years.
All supplies of commercial properties are subject to VAT at 5%, including all buildings or parts thereof that are not residential buildings.
Registration for VAT Purposes
The owners of residential buildings do not register for VAT if they do not have any other business activities. However, owners who do have other business activities must check to see whether or not they are required to register.
The owner of any building that is not residential, will have to register if the value of the supplies over the preceding 12 months exceed AED375,000 in value, or if it is expected that they will exceed AED375,000 over the coming 30 days.
An owner of a residential building will not be able to recover VAT on expenses related to the supply of the exempt residential building. Meanwhile, an owner of a commercial building will generally be able to recover VAT on expenses related to the supply of the building.
The rent or sale of a residential part of the building shall be treated as zero-rated or exempt, depending on whether this is a first supply or a subsequent supply. The rent or sale of a commercial part of the building, however, shall be treated as subject to VAT at 5%.
The tax incurred by the owner on the building needs to be apportioned where there is an exempt supply, and the portion related to the taxable supply (at 0% and 5%) may be recovered.