The Federal Tax Authority (FTA) of the United Arab Emirates has issued a press release clarifying how value-added tax (VAT) will be implemented on real estate transactions when it comes into force, which is due to be from January 1, 2018.

The FTA spelled out the general principles for how VAT will be charged, which will differ for residential and commercial properties.

It said the supply of real estate can be defined as the sale, leasing or even the giving of the rights to properties.

The first supply of residential property will be zero rated (meaning that input costs can be reclaimed) for the first three years following its construction. After this time, it will be exempt from VAT, but owners will no longer be able to reclaim input costs. If a residential unit is sold even within the first three years, any subsequent sales or rentals will be exempt, but will no longer be zero-rated.

The FTA said in its release residential properties do not include hotels, motels, bed and breakfast or serviced apartments "for which services in addition to the supply of accommodation are provided".

Owners of residential buildings do not need to register for VAT if they do not have any other business activities, the FTA said in its statement, but owners that have other business interests will need to check whether they are required to register or not.


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It said that all commercial buildings - including hotels, shops and offices - are subject to VAT at the standard rate of 5 percent, but that owners will generally be able to recover VAT on expenses related to the supply of the building.

Owners of non-residential buildings whose supplies to the building have added up to more than 375,000 UAE dirhams ($102,095) over the past 12 months, or who expect supplies to add up to more than 375,000 dirhams within the next 30 days, will be obliged to register for VAT, the FTA's press release said.

Landlords will need to apportion tax on mixed-use buildings appropriately.

At a press conference earlier this month, the FTA's director-general Khalid Al-Bustani said that businesses need to register for VAT before December 3 in order to give the required 20 business days for applications to be processed before the new VAT regime is set to commence on January 1, 2018. Firms that fail to register on time will face penalties, Al Bustani added.

All six Gulf nations signed an agreement last year to introduce VAT at a standard rate of 5 percent, but so far only Saudi Arabia and the UAE have agreed to introduce VAT on January 1, 2018.

For Zawya's special coverage of the introduction of VAT, click here.

© ZAWYA 2017