Is VAT payable on the purchase of real estate and if so, can it be recovered?
The United Arab Emirates introduced a VAT regime on 1 January 2018. From 1 January 2018, the sale of real estate by businesses which are registered for VAT is subject to the following VAT rates:
A special payment procedure may be applicable with the sale of certain commercial real estate by any supplier other than the developer of the property. If this procedure is applicable, the buyer of the real estate must pay the VAT directly to the Federal Tax Authorities (FTA) instead of to the supplier.
Once the payment of the VAT has been made to the FTA, the buyer will receive a Payment Transaction Number. The buyer will be required to produce the Payment Transaction Number to the Land Department in order to process the ownership transfer of the commercial real estate.
In the case of investment properties, the transaction may be treated as the "transfer of a going concern" which is considered out of the scope of VAT. The conditions for obtaining this treatment could be complex and should be closely assessed on a case-by-case basis.
Whether VAT can be recovered by the buyer will generally depend upon the use of the property. If and to the extent the buyer is using the property to generate taxable supplies (eg charging VAT on rents) then the VAT can in principle be recovered. If the real estate is used for VAT exempt activities, the VAT may not be recoverable. Special input tax apportionment methods for determination of VAT recovery percentage may be available (eg floorspace method), subject to conditions.
The buyer should take advice as change of use of the property could give rise to adjustments. If the VAT paid (input VAT) exceeds the VAT for which the buyer has to account for (output VAT) there may be a delay before the recoverable VAT is repaid by the Federal Tax Authority.