Commercial Real Estate and VAT (Value Added Tax)

In accordance with the Federal Decree Law No. 8 of 2017 for value added tax issued on 23 August 2017 and Cabinet Decision No. (52) of 2017 on the Executive Regulations of the Federal Decree-Law No (8) of 2017 on Value Added Tax, effective from 1^stof January 2018, VAT was implemented in the United Arab Emirates and its impact is being widely felt. What does this mean for owners and tenants and how do the relevant stakeholders prepare themselves, is a key question on everyone’s mind.

The majority of Commercial Real Estate in Dubai, at least in the Freehold areas are owned by Private Investors, structured as Individuals, Jebel Ali Offshore companies or BVI Companies / RAK or any other jurisdiction, that have purchased real estate, as an investment. The Purchased Real Estate is not used for the use of the business. Furthermore, even in non-freehold areas, the majority of real estate is dominated by single family or family owned groups, that are renting the offices / shops and warehouses for investment.

Typically, Dubai, has a very small real estate ownership for Business’s self-use, i.e. the Business itself owning the Real Estate which it occupies. Whether this is due to cash constraints on businesses or whether the Local / Foreign ownership percentages, this has an impact on Business’s wanting to purchase Real Estate in the name of the company.

What is clear from the 1^stof January is that 5% VAT will be applied on Rental and Sale of Commercial Real Estate. What is included in Commercial Real Estate for applicability of VAT is outlined below.

1. Offices
2. Retails Shops
3. Warehouses

Currently, Federal Tax Authority (FTA) mandates that businesses or individuals that have an income of more than AED 375,000 are required to be registered for VAT, i.e. Mandatory Registration. Those Businesses or Individuals that have an income of more than AED 187,500 can register for VAT as Voluntarily, i.e. Voluntary Registration. This leaves currently a Gray Area for Property Owners, which have Commercial Rental Income of less than 187,500, as they are currently not able to register for VAT. Currently the understanding is Property Owner’s that have income less than 187,500 will not be able to charge or collect or offset VAT, and will be considered as the final consumer. Under the current scenario, this is advantageous to Tenant’s as they would not be able or need to pay VAT. We however do expect there to be some check and balance on this, however as of now it does not seem clear. The application for registration is completed on the FTA website. Once the application is approved, FTA issues a Tax Registration Number (TRN) which needs to be printed on all the tax invoices. Therefore in order to generate an Invoice with VAT, a Tax Registration Number (TRN) Number is required, and in order to get a TRN Number, the Business or Individual is required to be register for VAT.  Furthermore, in order for businesses (i.e. the Tenant) to be able to claim back / offset the VAT paid with regards to Rent, it requires an Invoice with a TRN Number.

The above two points, effectively makes it mandatory, whether by law, or by requirement of Tenant’s; all commercial owners are required to be Registered for VAT, Collect VAT and File for VAT.

Rental of Commercial Property (Assuming Landlord is registered for VAT)

From the 1^stof January 2018, Landlords are required to be charging their Tenants 5% of VAT on a pro rata basis and the amount needs to be filed with the authorities based on their Filing Period. Based on the last couple of registrations we have done for clients, we are getting First VAT Return Dates of 31^stof May 2018. This might be different depending on the date of registration.

We are getting a lot of feedback from Landlords and Tenants that the Tenants are not wishing to pay any additional rent or fees i.e. VAT, in addition to what is already agreed in the Tenancy Contract. As a result, we have heard various negotiations among Landlords and Tenants. What should be happening, is the Landlord should be charging 5% VAT in addition to the Rental Amount. The Tenant will pay the Landlord the 5% VAT and can offset the 5% VAT Paid on the VAT Collected from their Sale of Good / Services.  Should Tenant not pay the VAT Amount, then they will not be able to offset this amount and the Landlord would be in effect be giving a discount to the Tenant of 5%. See example below.

Current Rent of AED 120,000 for Commercial Office from 1^thof July 2017 to 30^thof June 2018. Rent is paid in One Cheque on the 5^thof July 2017 (I.e. before the 1^stof January 2018 VAT Introduction)

1. VAT Payable on a Pro Rata from 1^stof January 2018.
2. Rental Amount for Tax Filing Period – 50,000
3. VAT Payable till 31^stof May 2018 – AED 2,500 ((120,000 * 5 / 12) * 5%
4. VAT Offset by Tenant – 2,500
5. VAT Payable by Landlord – 2,500, less any VAT Paid for Service Charges, Management Fees, Maintenance of Offices or any other Utilities.

Using the above example, if the VAT is not paid by the Tenant and the Rent remains the same at 120,000, then it is considered as VAT Inclusive, and the amounts are.

1. VAT Payable on a Pro Rata from 1^stof January 2018.
2. Rental Amount for Tax Filing Period – 50,000
3. VAT Payable till 31^stof May 2018 – AED 2,380 (50,000 * 5% / 105%)
4. VAT Offset by Tenant – 2,380
5. VAT Payable by Landlord – 2,380, less any VAT Paid for Service Charges, Management Fees, Maintenance of Offices or any other Utilities.

Sale of Commercial Property

 Similar to Rent of Commercial Property, Sale of Commercial Property is also subject to 5% of VAT of the Sale Amount. This effectively brings the cost of a transaction to;

1. 4% Fees Payable to Dubai Land Department
2. 5% Fee Payable to Federal Tax Authority (Can be recovered back from FTA)
3. 2% Commission Payable to Real Estate Agent + VAT
4. 4,000 Payable to Real Estate Trustee + VAT
5. 500 – 5,000 Payable to Developer for NOC Charges + VAT

This increase in the cost of Transaction by an additional 5% (recoverable from FTA) and the additional reporting requirements that Landlords / Investors are to be subjected to, has brought the Commercial Real Estate market to a grinding halt. Whereas we have been seeing deflationary pressure on the Commercial Market over the last 12 – 18 Months, the last 6 months has seen a faster pace of decline over any other period.

Whereas the understood thought process of the FTA is that the 5% payable for the Purchase of Real Estate can be offset by the VAT Obligations of the Buyers through Sale of Goods / Services, it brings us back to our first point that the majority of Commercial Real Estate is owned by Investors / Private Individuals, so the 5% paid of the Property Value is not able to be offset or claimed against any Payable VAT by the Business, which would have individual owners having to file claims for its refund.

Furthermore, our understanding is, if the Buyer (registered landlord/business) has paid the 5% VAT on purchase of a Property, they can carry forward the VAT Paid (if not adjusted fully against the VAT collected from revenue on property) for two Taxable Periods and if there is still excess VAT to be refunded to the Buyer, the Buyer can the apply to the FTA for refund of the VAT.

They are additional details of the law, which include that any VAT paid for Properties over 5,000,000, the VAT can be offset by the Business over a maximum of 10 Years. They are numerous additional details that would applicable on a case by case basis.

Way Forward

Whereas a lot of clients seems to be getting conflicting messages with regards to their obligations under VAT, we encourage all clients to reach out to a Tax Consultant, the FTA to get a better understanding of their obligations under VAT.

Below is a link to some reading materials with regards to the VAT and its obligations.

https://www.dropbox.com/sh/c3u81pb6igogmst/AABrbhHR_U0hqNw9lJ3phrOna?dl=0

Should you have any questions, please reach out to us at

Email: Hussain.pooya@w2realestate.com

Call at: +971508565256

The information contained in this document is for general guidance on matters of interest only. The application and impact of VAT Law can vary widely based on the specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be omissions or inaccuracies in information contained in this document. Accordingly, the information on this document is provided with the understanding that the author is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. Before making any decision or taking any action, you should consult a professional as mentioned above.