TAX on the commercial real estate. Answers to the main questions.

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Foreign commercial real estate is often perceived as a promising investment object, especially if the fiscal system of the chosen country differs favorably from the investor’s homeland. Speaking of Dubai, the emirate is widely known precisely because of the soft tax regime. The recently introduced VAT is only 5%. Nevertheless, any investor wants to know when and what for to pay money.

How does the adoption of VAT influnce on the real estate market in Dubai?

Let’s talk about the commercial real estate which is used for placing offices, shops, hotels, points of a food or for realization of other kinds of activity which are assessed with the VAT under 5% rate.

As for the sale of residential real estate, in most cases VAT is not charged, since these transactions are taxed at a zero rate. This principle will be in effect for 3 years from the completion of the construction work.

Value added tax in the UAE is levied on all transactions with commercial real estate, whether it be buying or selling or renting. Tenants and buyers are obliged to pay taxes. The owner of the real estate leased out is obliged to issue an invoice for VAT. It is worthy to note that a similar document must be issued by the owner who sells his property.

To make a successful transaction, both the seller and the buyer must be registered as VAT payers.

Contract and procedure

Sales and purchase agreements must necessarily contain provisions on VAT, which indicate who is responsible for paying the tax. As a rule, this obligation is for the buyer of commercial real estate in Dubai. It is interesting to note that if there is no such clause in the contract, then the UAE legislation will consider that the price specified in the agreement already contains VAT – i.e. the seller will receive a smaller amount than expected.

For the payment of tax registration of both parties to the transaction is required, however, the buyer submits the first declaration to the Federal Tax Authority.

The information needed:

taxpayer registration number; number of the land on which the commercial property is located; the amount of VAT (preferably an invoice issued by the seller); the date of sale; the department where the real estate is registered.

The seller declares the required amount as “VAT charged”, and the buyer – as “paid VAT”.

There is also an opportunity to conduct a transaction with zero VAT – provided that the real estate is sold “as an operating enterprise”, i.e. if the premises are already rented by the tenant.

How will the VAT be charged when the part of the building is residential and part of it is commercial premises?

The sale or lease of residential space is taxed at a zero rate or exempt from taxation (depending on whether this is the first real estate transaction or not). All transactions with commercial real estate are taxed at a 5% rate. The costs of tax payment incurred by the owner must be proportionally recalculated. In cases in which VAT is charged (at a rate of 0 to 5%), the amount of expenses can be compensated.

Understanding the tax system of the chosen country is a prerequisite for successful investments in foreign commercial real estate.