UAE government has decided to implement VAT at the rate of 5% from the 1st Jan of 2018. After the initial announcement, the businesses were required to create an account and register at the Federal Tax Authority’s official website.

Accordingly, the supply of real estate includes, but is not limited to, sale or lease of property but not right on the property.

In order to calculate the VAT, a residential building is a building which was designed and constructed to accommodate people. It can be more than one building, but it doesn’t include:

  • A building that can be moved around without damaging or destroying it and is not fixed to one location.
  • Any building that is used for commercial purposes like hotels, restaurants, motels, etc.
  • A building that was made or modified illegally
  • An apartment that was meant for service but is used for other purposes.

Similarly, there are rules for commercial buildings:

The definition is very simple here. Any building that is not a residential building is a commercial building.

The important point to note over here is that once you have paid VAT on your real estate building, you will not be able to recover it unless you have some sort of business activity. In that case, you are required to look at some of the legislation.

Therefore, what happens if a building is being used for both commercial and residential purposes at the same time. In this case, the VAT will be treated differently.

As an owner, you can’t recover VAT with respect to those expenses that are related to the supply of buildings that are residential. You can recover VAT only if the building or part thereof is being used for commercial purposes. This is in line with the previous statement.

VAT will, without a doubt change the real estate market in UAE.