The UAE’s real estate market is a hub for local and international investors due to its attractive tax environment. While the country does not levy personal income tax or federal corporate tax on most real estate transactions, Value Added Tax (VAT) was introduced on 1 January 2018 through Federal Decree-Law No. (8) of 2017 on VAT. This had important implications for property sales, leases, and services.
Understanding the VAT framework is crucial for buyers, sellers, developers, and landlords to ensure compliance and avoid unforeseen costs. This article provides a comprehensive overview of how VAT applies to real estate transactions in the UAE.
This blog is a part of our Legal & Regulatory Framework in UAE Real Estate Blogpost.
VAT Applicability in Real Estate Transactions
Residential Properties
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- First Supply (New Residential Properties)
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The first supply of a residential property (through sale or lease) within 3 years of its completion is zero-rated (0% VAT). This applies mainly to off-plan or newly completed units sold by registered developers.
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- Subsequent Sales or Rentals
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Sales or leases of existing residential properties (resale market) are exempt from VAT. Input VAT on related expenses cannot be recovered in exempt supplies.
Commercial Properties
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- Sales and leases of commercial real estate (e.g., offices, retail, warehouses) are subject to 5% VAT, whether first or subsequent supply.
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Bare Land
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- The sale of bare land is exempt from VAT. If a land is partially developed (e.g., utilities installed), it may not qualify as “bare.”
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Mixed-Use Properties
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- Properties with both residential and commercial elements are apportioned for VAT purposes.
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- Developers may need to calculate and apply VAT only on the commercial portion.
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VAT Registration Obligations
- Mandatory VAT registration is required for persons (including developers or landlords) whose taxable supplies exceed AED 375,000/year.
- Voluntary registration is available for those exceeding AED 187,500/year.
- Tenants or individuals buying property for private residential use are generally not required to register.
VAT on Leases
- Residential lease agreements are exempt from VAT.
- Commercial lease agreements attract 5% VAT. This VAT is typically payable by the tenant and must be accounted for in rental negotiations.
VAT on Real Estate Services
- Property management, maintenance, facility management, brokerage, and consultancy services are subject to 5% VAT.
- Charges billed by Owners’ Associations or community managers are also subject to VAT if the supplier is VAT-registered.
Transfer Fees vs. VAT
- Dubai Land Department (DLD) and other authorities charge a transfer fee (usually 4%) on property transactions.
- This is not VAT and is payable in addition to any applicable VAT on the transaction.
Off-Plan Sales and VAT
- Off-plan residential units sold within 3 years of completion are zero-rated, but the developer must be VAT registered.
- Commercial off-plan units are subject to 5% VAT from the outset.
Free Zone Transactions: Designated Zones
Under Cabinet Decision No. (59) of 2017, specific free zones are classified as “Designated Zones” for VAT purposes. Transactions within or between these zones may be treated as outside the scope of VAT, provided:
- The transfer occurs within the Designated Zone.
- No local consumption occurs (e.g., sales do not include supply of services or infrastructure).
However, VAT may still apply to services (e.g., facility management, fit-out) even in designated zones.
Implications for Buyers and Sellers
- Buyers of commercial property may be able to recover VAT if VAT-registered and making taxable supplies.
- Sellers/Developers must charge VAT on eligible supplies and report accordingly.
- Contracts must clearly outline who bears the VAT, and whether it’s included or exclusive of the purchase price.
Key Considerations for Real Estate Investors
- Carefully evaluate whether a property is exempt, zero-rated, or standard-rated.
- Understand who bears the VAT liability and whether VAT is recoverable.
- Review contracts for VAT clauses and ensure proper invoicing and recordkeeping.
Conclusion
VAT is a critical component of property transactions in the UAE, with direct implications on pricing, cost recovery, and legal structuring. Although residential properties enjoy exemptions and zero-rating in certain cases, commercial real estate and associated services are generally taxable.
Buyers, sellers, and developers must ensure proper classification of their transactions and adhere to FTA regulations to remain compliant. Given the complexities, it is prudent to seek legal and tax advice before engaging in any significant property-related transactions in the UAE.
