In 2018, UAE’s government is imposing a new VAT that has a variety of implications for the country’s real estate market.

1. SPOTLIGHT - HOW WILL THE VAT AFFECT REAL
ESTATE IN THE UAE?
DR. EHSAN BAYAT

2. SPOTLIGHT - HOW WILL THE VAT AFFECT REAL ESTATE IN THE UAE?
 At the start of 2018, the United Arab Emirates (UAE) and other parts of the greater Gulf region will
implement a 5 percent value-added tax (VAT) on the majority of goods and services. Gulf-area
governments proposed this tax to help them deal with the serious deficits they will face in the coming
years as a result of the drop in oil prices. These nations, which will face a $350 billion deficit according to
the IMF, need non-oil revenue to help avoid borrowing money to cover the need. The VAT is estimated
to bring in an addition 1.5 percent of gross domestic product, which could cover a quarter of the
expected deficit. However, the end payer of the tax is the consumer, and many people have raised
concerns about how the tax could affect real estate transactions.

3. VAT EXEMPTIONS FOR RESIDENTIAL PROPERTIES
 Recently, the UAE Ministry of Finance announced that residential property, as well as bare land, would be
among several items exempted from the VAT. Other exemptions include certain financial services and local
transport. According to the ministry’s website, the sale and lease of residential properties will be generally
exempt to avoid creating situations in which individuals could no longer afford to purchase or lease personal-
use properties due to the additional 5 percent tax. The real estate sector is a major part of the UAE economy,
and imposing the VAT on residential properties could seriously harm the market and end up costing the
nation money.
 The VAT could also pose significant issues for developers. To help avoid these issues, the first offering of newly
constructed residential properties will face a zero-rated tax for a period of three years. A zero-rated VAT means
that developers still have to report the sales, but the actual tax rate would be zero.
 These exemptions could actually help boost the real estate market, especially in Dubai, which had 41,776 sales
transactions last year. While prices are not actually lower, individuals may feel like they are getting a deal by
avoiding the VAT.

4. COMPLICATIONS FOR PROPERTY SERVICE PROVIDERS
 While residential rents and sales may not face the VAT, property owners, buyers, sellers, and tenants will
still have to deal with it. Services provided by law firms, maintenance companies, and real estate
agencies will be subject to the VAT, so the overall cost of these necessary aspects of the real estate
market will increase. These service providers will have to make a decision about whether they should
reduce the cost of their services to compensate for the tax or simply increase prices by 5 percent to
cover the VAT.
 Notably, the new tax is on top of the 4 percent fee for purchase transactions and the 5 percent fee
people pay for rentals in Dubai. Industry experts believe that both developers and buyers could suffer
because of the added burden.

5. COMMERCIAL PROPERTIES SUBJECT TO THE VAT
 The property VAT exemptions include only residential properties. Commercial property transactions,
including both sales and leases, will be subject to the new tax, which will increase the price of doing
business in the UAE. As office buildings, hospitality providers, and other commercial properties get
taxed, landlords will likely pass the VAT along to tenants, so there will likely be an increase in commercial
rents starting in 2018. However, commercial developers may also feel pressure to make their properties
more competitive and undertake various value-added initiatives, such as fitting out properties so that
tenants do not have to do it.
 Another effect of including the VAT on commercial property transactions is a greater need for legal
assistance. Because contracts must now include the VAT, more potential buyers and sellers will need to
consult with lawyers about tax rates and who must pay the VAT. Legal assistance can help guarantee that
all parties execute contracts correctly, so no one gets unfairly surprised by the tax.

6. THE VAT AND THE REAL ESTATE DEVELOPMENT INDUSTRY
 Real estate construction will be heavily impacted by the VAT. While it doesn’t affect the sale and lease of
certain properties, the VAT will apply to the large range of construction materials and services necessary
for completing a new structure. According to the UAE Ministry of Finance, bare lands are also exempt
from the VAT, but developers will face increased costs in other parts of the development process.
 The VAT becomes particularly problematic for prior contracts that continue into 2018, because these
agreements did not account for the tax. However, as previously mentioned, UAE’s government is taking
steps to minimize the impact.

7. THE OVERALL IMPACT OF THE VAT
 Some industry experts expect the VAT to affect the real estate industry in the UAE very little in both the
short and the long run. With some planning, businesses can pass the tax both up and down the supply
chain to mitigate the overall impact and ensure that no single party bears the brunt of the tax burden.
Furthermore, when compared with other countries around the world, the tax burden in the UAE will still
be very small because individuals pay relatively low fees for property registration and other processes.
Because of these two factors, VAT will not likely hurt the market in a significant way. In fact, it could even
provide a slight boost to the residential market.