Dubai Properties to be Exempted from VAT

On March 27, 2017, the Ministry of Finance announced that both residential sales and rental leases in Dubai (as well as throughout the United Arab Emirates) would be exempt from the value-added tax, or VAT, introduced by the government on Jan. 1, 2018. The VAT still applies to both sales and leases of commercial properties, increasing tax revenue from the sector. This new policy is intended to further bolster the UAE and Dubai property sectors’ increasing growth after several years of decline, as well as to diversify the market’s funding sources.

In previous years, it was common for properties in the UAE to experience declining capital values of 20 or even 30 percent after property prices peaked in 2014. As buyers became more enthusiastic about the UAE market once again, many experts and market watchers thought a VAT on residential properties would slow activity and inhibit the market’s rebound from current lows. Therefore, the Ministry of Finance is taking steps to ensure the current strong resurgence in market activity can continue unhindered.

Dubai’s property transactions are subject to a 4 percent transfer fee from the Dubai Land Department, and Dubai expats are universally charged a housing fee regardless of whether they rent or own a property. This housing fee is calculated at 5 percent of the property’s rental value. Mortgaged owners are also subject to a 0.25 percent fee on the total loan value.

In addition to this, property transfer fees to developers in Abu Dhabi range from 1 to 2 percent (commonly a government-owned developer), while renters pay a 3 percent housing fee. Taken as a whole, these fees and charges constitute a nonnegligible tax cost for property owners and renters alike. Had the Ministry of Finance added a VAT, this would have essentially doubled the taxes on residential properties.

The VAT on commercial properties is anticipated to generate more than AED 32 billion in revenue for the UAE government over its first two years. The VAT is a part of the UAE government’s ongoing efforts to gain financial independence from the fossil fuel industry, especially in light of record low international oil prices. The UAE government sees the implementation of the VAT as a necessity to diversify funding sources in order to effectively move away from overreliance on fossil fuels.

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