In the UAE, everyone with property is waiting to see how the revised VAT laws will affect property sales.
For now, everyone is thinking the exact same thing, prepare for this eventuality as much as you can and then wait and see what happens. However, we can still make some deductions as to how this new tax may affect sales based on the information we have.
However, before we get into that, let us explain what VAT is.
VAT stands for Value Added Tax. It is a tax that is put on a product whenever a value is added at a stage of production and at the point of sale. The amount of VAT a person has to pay depends on the cost of the product, minus the costs of materials used in the product that has already been taxed.
Now let us go into the meat of the matter.
It is expected that the 5 % VAT on property transactions will only impact those buying and renting commercial properties and large-scale investors in the UAE.
Renters of residential properties won’t have to worry about taxation as residential leases are exempt from the VAT. Landlords, on the other hand, might lose out on other expenses which they incur with VAT, which may, in turn, affect rental prices.
VAT will definitely affect the prices of construction contracts for developers. It is important that Dubai developers lock down processes so that they are fully prepared to recoup potential losses.
Because the sale and purchase of newly constructed real estate will most likely be zero-rated, residential property investors will not have to pay VAT to a developer or a seller. However, investors will most likely have to pay VAT to lease providers and property management services who will not be able to recover this VAT. So, large-scale investors will be affected.
Developers will need to make sure that their documentation clearly states that VAT is payable by investors or else they will have to absorb the cost. Commercial tenants will also need to pay VAT; however, this should not cause much trouble as they can offset this VAT against VAT collected on supplies used for construction.