VAT on Commercial Property in the UAE

Value Added Tax (VAT) is a consumption tax added to the price of goods and services at every stage of production and distribution. In the United Arab Emirates (UAE), VAT was introduced in 2018 at a standard rate of 5%. This tax applies to most goods and services, including commercial property transactions. Understanding the implications of VAT on commercial property in the UAE is crucial for investors, developers, and real estate professionals operating in the UAE.

At Shuraa Tax, we understand the importance of VAT for your business to function without interruption. That’s why we’re here to explain everything you need to know about VAT on commercial property in the UAE. We aim to clarify VAT rules for commercial property, including who pays VAT on sales and leases, VAT recovery for buyers, and special cases like mixed-use properties.

What is VAT in the UAE?

VAT in the UAE stands for Value Added Tax. It’s a tax applied to most goods and services purchased by consumers in the United Arab Emirates.

Standard Rate: 5% on most taxable goods and services.

Exceptions: There are zero-rated supplies (0% VAT) and exempt goods and services.

• Zero-rated supplies include exports outside the Gulf Cooperation Council (GCC), international transportation, certain essentials like healthcare and education, and the first supply of residential property.
• Exempt goods and services typically don’t involve adding value, like financial services and local public transport.

What is Commercial Property?

Commercial property, also called commercial real estate or investment property, is land or buildings used for business purposes and to generate profit. This can come from rental income or from an increase in the property’s value (capital gains) when it’s sold.

Some properties may combine commercial and residential spaces. VAT treatment for these properties depends on which part is being sold or leased (commercial vs. residential).

VAT on Commercial Property Sales in the UAE

The sale of commercial property in the UAE is subject to the standard Value Added Tax (VAT) rate of 5%. This applies to the total consideration received by the seller, including any installments.

Commercial buildings in the UAE exceeding a purchase value of AED 5 million are considered capital assets for VAT purposes.

Who Pays VAT on Commercial Property?

The seller of the commercial property is responsible for charging VAT to the buyer on the sale price. The seller must then account for this VAT to the Federal Tax Authority (FTA).

Vacant vs. Rented Properties

Both vacant and rented commercial properties are subject to the 5% VAT on the sale price. However, there’s special treatment for properties with existing tenants if the buyer is a Taxable Person (registered for VAT) and the sale qualifies as a transfer of a going concern (essentially a business transfer). In such cases, the transaction might be exempt from VAT.

Reverse Charge

The concept of “reverse charge” applies in situations where the supply of goods or services happens between a registered business and an unregistered business. In these cases, the liability to pay VAT shifts to the recipient (the registered business).

However, this mechanism does not apply to domestic commercial property sales in the UAE. Since both buyer and seller typically operate as registered businesses for VAT purposes, the standard VAT collection method applies.

VAT Recovery for Buyers

VAT-registered buyers can recover the 5% VAT paid on the purchase of a commercial property. This can be claimed through their VAT return filed with the Federal Tax Authority (FTA). The recovered VAT amount reduces the overall tax burden for the buyer.

10-Year Monitoring Requirement

It’s essential to note that VAT-registered buyers who claim VAT recovery on a commercial property purchase have a 10-year monitoring requirement. This means they need to track how the property is used for the next ten years.

If the property’s use changes from a taxable supply (e.g., rented out for commercial purposes) to an exempt supply (e.g., converted to residential use), the recovered VAT may need to be partially or fully repaid to the FTA.

VAT on Commercial Property Leases

The lease of commercial property in the UAE is subject to Value Added Tax (VAT) at the standard rate of 5%. This applies to the total rent paid by the tenant to the landlord. The landlord must register for VAT if the value of their taxable supplies exceeds the mandatory registration threshold of AED 375,000.

There is a key exception: the lease of residential properties is generally exempt from VAT. This means there’s no VAT charged on the rent paid for residential units.

Special Considerations for VAT on Commercial Property

First Supply of Residential Buildings

The VAT treatment for residential properties differs from commercial properties. For the first supply (sale or lease) of a newly constructed residential building within 3 years of its completion, a zero-rate VAT applies. This means there’s no VAT charged on the transaction.

However, it’s important to note that subsequent supplies of the same residential unit (i.e., resales or new leases after the 3-year period) are generally exempt from VAT, not zero-rated. This distinction means no VAT is charged, but any previously paid VAT on the property cannot be recovered by the seller.

In contrast, the sale of commercial property is always subject to the standard VAT rate of 5%, regardless of how long it’s been constructed. There’s no zero rating or exemption for commercial property sales.

Mixed-Use Properties

For buildings containing both commercial and residential spaces, VAT treatment depends on the type of space being sold or leased.

Commercial Space: Rent or sale of the commercial portion will be subject to VAT at the standard 5% rate.

Residential Space: Rent or sale of the residential portion will be treated differently depending on the timing:

• First Supply within 3 years: Zero-rated (no VAT).
• Subsequent Supplies: Exempt from VAT (no VAT charged).

VAT Recovery for Businesses

Businesses registered for VAT can recover the VAT they pay on relevant expenses related to their commercial property transactions. This includes VAT paid on rent, maintenance fees, utilities, and other related costs incurred for operating a commercial property used for taxable supplies (e.g., renting the space out for commercial purposes).

This recovered VAT can be claimed through their VAT return filed with the Federal Tax Authority (FTA).

VAT Registration Process for Commercial Property in UAE

Registering for VAT (Value Added Tax) for commercial property in the UAE involves several steps. Here’s a general process:

1. Assess Your VAT Registration Requirement

VAT registration is mandatory if your taxable supplies and imports exceed AED 375,000 in the last 12 months or are expected to exceed that amount in the next 30 days.

2. Prepare Documentation

Gather the necessary documents required for VAT registration. These typically include:

• Trade license
• Emirates ID and passport copies of the owner(s) or authorized signatories
• Proof of address for the business premises
• Details of shareholders/partners
• Bank account details

3. Create an e-Services Account

Visit the Federal Tax Authority (FTA) website (https://tax.gov.ae/en/services/vat.registration.aspx) and create an e-Services account. This account will be used for all VAT-related transactions.

4. Register for VAT

Once logged in, locate the “Register for VAT” option on the e-Services portal. Follow the on-screen instructions to complete the online VAT registration form.

The form will ask for details about your business, including:

• Business name and legal structure
• Contact information
• Trade license details (if applicable)
• Expected taxable supplies

You may need to upload supporting documents like trade licenses and financial statements.

5. Payment and Processing

There might be a registration fee associated with VAT registration. Pay the fee if applicable using the available online payment methods. The FTA will review your application and supporting documents. This process typically takes around 30 days.

6. Receive Notification and Use Your TRN

Upon approval, you’ll receive a notification from the FTA and your Tax Registration Number (TRN). This TRN is crucial for all future VAT-related transactions, including filing VAT returns and issuing VAT invoices.

It’s essential to consult with a tax advisor or legal expert like Shuraa Tax who is familiar with UAE VAT laws to ensure compliance throughout the registration process and beyond.

VAT Deregistration for Commercial Properties in the UAE

VAT deregistration for commercial properties in the UAE isn’t directly tied to the property itself, but rather to your overall business activity and taxable supplies. A business can apply for VAT deregistration with the Federal Tax Authority (FTA) if it meets any of these conditions:

• The total value of your taxable supplies and imports in the past 12 months falls below AED 187,500 and you expect it to remain below this threshold in the next 30 days.
• The total value of your taxable supplies and imports in the past 12 months falls below AED 375,000. This was the mandatory registration threshold initially, but if you registered earlier and your business has shrunk, you can deregister if you fall below this amount.
• You cease all business activities and no longer make any taxable supplies.

Deregistration can be relevant if the income from your commercial property (rent or sales) was a significant contributor to exceeding the VAT registration threshold. If, after deregistration, you plan to rent out the property again or sell it in the future, you won’t be able to charge VAT as you’ll no longer be a VAT-registered business.

Process for Deregistration

• The application for deregistration must be submitted electronically through the FTA’s e-Services portal within 20 business days of meeting the deregistration criteria.

• You’ll need to settle any outstanding tax liabilities and file all due VAT returns before deregistration is approved.
• The FTA will typically review your application within 20 business days.

Let Shuraa Tax Handle Your UAE VAT

VAT on commercial property in the UAE is a complex topic that requires careful consideration and expert advice. Staying informed about VAT regulations on commercial property is crucial to avoid any compliance issues or unexpected tax burdens. The complexities of VAT, especially regarding deregistration, property use monitoring, and capital assets, can be overwhelming.

Shuraa Tax, a leading tax advisor in Dubai, can simplify VAT for your business. Our team of experts will provide comprehensive assistance with all your UAE VAT needs. We’ll guide you through the relevant regulations, VAT process, and ensure proper submission of returns.

Don’t let complex VAT jargon hold you back. Leave the tax headaches to us. Get a consultation with Shuraa Tax today at +971508912062 or info@shuraatax.com.