The VAT implications for commercial real estate companies are quite complicated given that it spans a number of activities such as purchase of and development of land, sales, leases and property management to name a few. This is further complicated by the fact that many real estate companies being involved in both residential and commercial transactions.
The scope of VAT is normally due on the supply based on where it is situated. For example, hotel accommodation, services of estate agents and experts, services relating to construction and architect services relating to specific plots of land. Secondment of staff by contractors and general advice relating to land or property markets would not be in the same VAT category as real estate.
A further point to consider when calculating VAT is the date of supply and in the case of commercial properties this will be the earlier of the date on which the goods were delivered, date on which payment was received or date on which invoice was issued.
Companies operating within the real estate sector must also consider factors such as pressure on profit margins, cash flow constraints and complexities arising from mixed operations in commercial and residential real estate.
From a profit margin perspective, certain residential real estate transactions would be treated as an exempt supply, which would mean that companies would not be able to claim back any VAT incurred relating to that type of activity. This would mean that their costs would increase by 5% as they would not be able to reclaim any input VAT from that type of activity and hence would squeeze margins. If the company has a mix of commercial and residential activities, which are exempt, and zero/standard rated, they will need to apply the partial exemption rule when claiming input VAT incurred. This would mean that only a portion of the input VAT could be reclaimed.
Cash flow is also an important factor in this industry especially for the real estate developers who would not be able to collect all input VAT incurred and would therefore need to find additional sources of liquidity for fund this. This is because as the majority of the payment for off-plan properties are collected once a development is complete, the extra 5% paid on input tax to contractors and building suppliers would need to be paid upfront with its collection in later periods. In addition to this, for any projects treated as a capital asset, then the input VAT incurred would only be claimable over the life of the asset and not fully on the next VAT return.
From an industry perspective, the extra burden of 5% on each real estate transaction on top of the 4% DLD (Dubai land department) fee could have a negative impact on the market with an expectation of a downturn in the sale of commercial real estate in the first year of VAT implementation.
Article 80 of the Federal Law No. 8 of 2017 on VAT details the rules relating to the transitional provisions with the intended purpose of avoiding invoices being issued or payments being made prior to the effective date of the VAT law for supplies which would effectively take place after the effective date of the VAT for the purpose of avoiding tax. For example, where a contract which runs post 1 January 2018, but does not state that the VAT is included on the supply, then by default VAT should be invoiced separately to the customer for the supplies made post 1 January 2018.
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This article has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of its contents.