Kuwait: The UAE’s newly announced federal corporate tax will be beneficial for the domestic real estate sector in the long run even though it could portend a marginal negative impact in the short term, according to a report issued today by Kuwait Financial Centre “Markaz”. Titled “Impact of UAE Corporate Tax on Real Estate”, the report takes a deeper look at the various aspect of the new tax regime and analyses anticipated effects on the residential, office, retail and industrial segments of the property market and the country’s economy.
 
On 31 January 2022, the UAE announced plans to introduce corporate tax at a rate of 9 per cent for taxable net income greater than AED 375,000 of companies. The regime will be effective for financial years starting on or after 1 June 2023. The proposed tax rate is competitive and is comparable to global low tax hubs. A different tax rate would be applicable for multinationals that meet the criteria of the global minimum effective tax rate under the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting initiative.
 
Examining the impact of the proposed corporate tax on the UAE’s real estate sector, the report highlights that although businesses including those operating in the real estate sector would be directly impacted as it entails payment of a share of income to the federal government, real estate investments of individuals will not be subject to tax. It would also not apply to investment returns earned by foreigners and income from real estate for individuals. However, because of lower post-tax profit, businesses could choose to mitigate the impact through several measures, or the impact could be absorbed across the value chain, with a portion of it passed on to end-users.  
 
Delving deeper into the possible outcomes in the property sector, Markaz projects that demand in the residential segment is likely to remain stable, as investments by individuals are not subject to corporate tax. However, given the recent pick-up in demand in residential space, developers could choose to increase prices to partly mitigate the impact of corporate tax on their business.
 
In the office segment, the introduction of tax might influence demand as a result of business decisions on office spaces and rentals, among others, in the short term. In the longer run, however, the impact is anticipated to be the least as the low tax rate might not significantly alter the UAE’s competitiveness as a business destination. In addition, factors such as the recent weekend switch would also aid in the demand for office spaces.
 
On the other hand, the retail segment is projected to have a pronounced impact as corporate tax could affect rent payments and demand for retail real estate because it affects the liquidity and profitability of businesses. Though retail occupiers are slowly emerging from the impact of COVID-19, the market has reportedly seen requests for rent-free periods and revenue share options citing the uncertain economic climate. Against this backdrop, owners of malls might find it hard to raise the rents. Similarly, the move might lower capital investments in the industrial segment as a result of which demand might be affected. 
 
The report also predicts an increase in project costs owing to second-order effects whereby material prices, construction and labour costs could rise. With interest rates set to rise in 2022, funding could get tighter for new real estate projects. These, along with lower profitability and liquidity, could translate to a slower rate of project expansion. Property prices might witness a rise if developers choose to increase unit prices to mitigate the impact of corporate tax.
 
Meanwhile, the implementation of corporate tax, the report notes, could result in greater transparency of business operations. This would mean a significant positive move for banks as they could better assess the credit and eventually, it could lower the cost of capital for various business operations.
 
While the introduction of the tax would certainly boost state finances, with the revenue set to be generated estimated at 14-15% of the government’s total non-oil revenue, it could affect the profitability of businesses and in turn lower investment plans. However, considering that the UAE’s proposed tax rate is comparable to other low tax hubs in the GCC region, the move might not have a significant effect on its attractiveness as an investment destination. Also, stronger government finances could increase capital spending by the government, especially in infrastructure, which could aid in increasing domestic and foreign investments, boosting demand for real estate.