GCC VAT : Real Estate Update

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GCC VAT Update

January 1st 2018 marks the long anticipated introduction of GCC VAT (Value Added Tax) to goods and services in the entire region. Whilst implementation is GCC-wide, each country is setting its own rules as to what is taxable and what is exempt. The UAE and KSA have both announced their detailed VAT guidelines recently and it is interesting to note that the two largest real estate markets are proposing to treat VAT differently in relation to land and property.

What is VAT?

VAT is a tax added to the goods or services that make a product whole. For example; a builder will buy bricks and his supplier will have added (in the case of the GCC), 5% to the cost of the bricks. The builder will employ the services of a painter, who having paid an extra 5% for his paint, will add 5% to the cost of his invoice. When the builder sells his completed house to the end user he will recoup the 5% by charging the purchaser an extra 5%.

Both the UAE and KSA have said that residential rents will be exempt from VAT. This means that landlords will not be adding 5% to tenancy contracts but it also means that landlords will not be able to reclaim VAT from the government for services pertaining to a property. Put simply, if a building needs a new door the landlord pays the cost of the door plus 5% VAT, but is unable to pass that cost to the tenant or receive a government refund.

GCC VAT: Two countries, two approaches

An interesting difference between UAE and KSA VAT is the charge on bare land (or ‘white’ land). The UAE has exempted the sale of land from VAT but KSA has added the tax. Additionally, KSA has instructed VAT be added to new-build properties whereas the UAE has declared new-builds as zero rated. This means that the end user in KSA will be paying an additional 5% on a new property whereas in the UAE they will not.

The distinction between exempt and zero rated is an important one to make. The UAE’s choice to zero rate new builds means developers will be able to reclaim VAT from the government for the goods and services used during construction, meaning the end user will not bear an additional 5% cost. VAT is still chargeable during the process, but is refundable on completion.

To summarise the main differences between the UAE and KSA

5% VAT will be charged in KSA on all real estate transactions but landlords will not be able to charge residential tenants. 5% extra, nor will they be able to recoup the 5% from the government resulting from costs relating to the property.

5% VAT will be charged on all real estate transactions in the UAE excluding bare land transactions. Newly built properties will be zero rated meaning the developer can recoup the 5% from the government. In the UAE residential rents are exempt in the same way as they are in Saudi Arabia.

While there is a lot of detail that remains unclear, a number of general observations can be made from the regulations as published this month.

It appears that the KSA legislation will be more widespread than that in the UAE and that it will therefore probably have a more adverse impact on the real estate sector.

It appears that residential developments will be favoured over commercial developments in both the UAE and KSA.
While treated the same in KSA, the residential for sale sector will benefit relative to the rental sector in the UAE.

Perhaps the greatest impact of any new taxes will be to cause uncertainty and therefore delay decision making. The introduction of GCC VAT is unlikely to be an exception and is likely to result in a reduction in both buying and leasing activity in early 2018 as investors and tenants assess its implications and prepare there businesses for their new regime.

JLL are not GCC VAT experts, but we will be monitoring the evolving situation closely over coming months. If you have any questions please contact JLL Consultants, but do not be too disappointed if we have to direct your enquiry to a tax specialist.

gcc vat update

 

Craig Plumb

Author: Craig Plumb

Craig has over 20 years’ experience providing clients with quality advice on real estate market conditions in the UK, Asia Pacific and the Middle East. With a background in urban economics and spatial planning, he has particular expertise in the areas of property market research, development consultancy, transport related infrastructure projects and corporate real estate.

Since moving to the UAE in 2006, Craig has authored over 50 research reports on different aspects of the MENA real estate market. He has also provided market research and consulting services to major investor, developer and government clients and has appeared as an independent real estate expert before the Dubai International Arbitration Centre (DIAC).

Craig holds a Bachelor of Arts in Economics & Geography from Lancaster University and an M.Phil in Environmental Planning from Reading University (UK).

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