With the implementation of Value Added Tax (“VAT”) in the UAE drawing ever closer, the UAE Government has now issued Federal Decree – Law No. (8) of 2017 on Value Added Tax (the “VAT Law”).
The issuance of the VAT Law follows closely behind the issuance of the Federal Tax Procedures Law as the UAE readies itself to go VAT live on 1 January 2018.
The VAT Law provides much awaited detail on a number of areas including the treatment of VAT on both commercial and residential real estate in the UAE.
What is VAT?
Simply put, VAT is an indirect tax charged on ‘Goods and Services’. The VAT Law has identified ‘Goods’ to include ‘physical property that can be supplied including real estate, water and all forms of energy as specified in the Executive Regulations to the VAT Law.’ The VAT Law has also confirmed that VAT will be imposed at the initial rate of 5%.
Treatment of VAT on Residential Property
The good news for home owners and residential tenants is that VAT will not be imposed on residential property. This exemption appears to apply to the residential status of the property irrespective of whether the sale of the residential property is to an end user or whether to a commercial business involved in the leasing of residential property.
Treatment of VAT on Commercial Property
As expected, VAT will be payable on the sale and leasing of commercial property. VAT will therefore be payable on the sale price of commercial property and on all rents under commercial leases. The additional cost to purchasers and tenants of commercial property will likely have an impact on property and rent values, however, provided that the purchaser and/or tenant can register for VAT (and comply with additional procedures and requirements pursuant to the VAT Law), the VAT element charged on the purchase price and/or rents should be recoverable from the Government.
Exemptions and Zero Rating
In addition to the residential property exemption, bare land will be exempt from a charge to VAT.
The sale of residential property by developers, as well as the sale of non-residential property that has been converted into residential use will be zero rated. What this means in practice is that whilst such property transactions will be treated as supplies subject to VAT, the rate charged on such supplies will be zero so will have no practical economic effect on consumers of those supplies. The rationale for zero rating these supplies rather than making them exempt is to ensure that developers can recover the cost of the output VAT (i.e. the VAT cost to the developer) incurred during development/conversion. The ability, however, for developers to recover such exempt supplies is only available within the first three years following completion of the residential property. Thereafter they will be unable to recover the output VAT.
Transfer of a Going Concern
In keeping with international principles of VAT, the VAT Law provides that where the sale of a business (which would ordinarily be subject to VAT) is deemed a ‘Transfer of a Going Concern’ (“TOGC”), then no VAT is payable on such transfer.
How is this relevant to property? In other jurisdictions such as the U.K., provided certain criteria are met, the sale of commercial property, which at the time of sale is leased to one or more occupational tenants, can be deemed a TOGC. The important factors to note are: (i) the building or asset must be classified as a business through the operation of the investment leases, and (ii) the purchaser of the asset must continue carrying on that business of property leasing. The VAT Law does not specifically mention that commercial property can be treated as a TOGC in this manner so it remains to be seen whether the Government will allow such treatment, however the wording regarding transfer of a business are sufficiently wide to make a convincing argument to the authorities.
Although not specifically mentioned or referred to in the VAT Law, where the sale of commercial property is subject to VAT it is likely that the Dubai Land Department transfer fees will be calculated on the property price plus any applicable VAT. By way of example, the transfer fees of a commercial property being sold for AED 10 million which is subject to VAT, will be charged at 4% of AED 10,050,000 (the VAT element being equal to AED 50,000) rather than AED 10,000,000 prior to the implementation of VAT. This will result in a slight increase to the transfer fees from AED 400,000 to AED 402,000. Clarification is being sought from the Dubai Land Department as to their intended procedures post implementation of VAT.
It is important for property investors and property professionals to remember that the obligation to account to the Government for any element of VAT rests with the seller and the landlord of commercial property. Where the seller and/or landlord does not sufficiently pass on any VAT liability to the buyer or tenant of commercial property, the cost of the VAT will need to be paid by the seller/landlord. Sellers need to ensure that prices are exclusive of all VAT and likewise landlords need to ensure that all stated rents in leases are exclusive of all VAT. If the relevant contracts are not sufficiently clear, the liability will remain with the seller/landlord whose sale price/rents will effectively reduce by 5%.