Dubai's real estate will feel little impact from the UAE's recent introduction of VAT, with nearly 85 per cent of the industry’s components tax free, officials said on Tuesday. 

The UAE has exempted residential properties and bare land from the 5 per cent tax, introduced in January, while newly-built residential properties that are supplied for the first time within three years of their construction are zero-rated. Unlike exempt goods and services, when businesses have zero-rated services and goods, they can reclaim VAT they have paid on costs from the government.

“Eight-five per cent of components in Dubai’s total real estate sector are not subject to the 5 per cent VAT,” Sultan bin Mejren, director general of Dubai Land Department said in a statement.

“When reviewing the details of sales, rents and other transactions, we found that the value of bare land sales, residential properties, and occupied commercial and retail properties comprise the largest percentage of total properties traded during 2017. This ratio is expected to remain over the coming years and even stands to increase with commercial offices continuing to improve their leasing operations and minimise empty units.”

With regards to rents, commercial real estate represented 31 per cent of leased property in Dubai, equivalent to Dh31 billion out of Dh66bn registered leases, he said.

The introduction of VAT in the UAE may impact parts of the real estate market this year, in particular the retail and office segments, as softer economic conditions force landlords to absorb extra costs, property consultancy JLL Mena said last month.

Dubai’s property market has suffered in recent years from increased supply, job cuts, reduction in housing allowances and slower economic growth, all of which have dented sales and impacted rents. Apartment prices in the emirate dropped 4.2 per cent year-on-year in the fourth quarter, while villa prices dipped 2.4 per cent over the same period, according to JLL.

“The [VAT] law stipulates that the first supply of residential buildings within three years of completion is subject to the zero per cent tax rate, which means that owners or investors can recover the tax related to the expenses incurred on construction,” said Khalid Al Bustani, director general of the Federal Tax Authority.

“Landlords who rent their properties for residential purposes are not required to register with FTA, if all supplies made by the owner are exempt from tax. In addition, the tax paid on facility management services of commercial buildings can be deducted by the owners on their VAT returns.”

Editor's Note: This article was originally published in The National on Tuesday March 20th, 2018 http://bit.ly/TheNationalDubaiProperty