Simplify VAT on Rental Income in UAE With Expert Services

Real estate has always been one of the UAE’s most attractive investment choices. However, Understanding the VAT on rental income in UAE is essential for every property owner to ensure compliance with tax regulations in order to avoid potential fines.

We’re talking about VAT on rental income in UAE. What is it? How does it apply? We’ll answer all these questions and more in this blog post.

What Is VAT on Rental Income in UAE?

VAT on Rental Income in UAE is part of the broader Value-Added Tax (VAT) system that the UAE government introduced in 2018. Why? Well, at that point, most, if not all, of the government’s revenue came from oil-/gas-related sources.

Property owners and landlords may also require professional VAT services to determine whether their rental income is subject to VAT and how to apply it correctly.

In the context of rental income, VAT isn’t a tax that landlords have to pay from the profit they make. It’s added to the rent of that property itself. Does it apply to all properties? Of course not!

At Alsun Bookkeeping and Taxation, we work with the best in the business, offering the best VAT services to ensure your financial transactions flow as smoothly as possible.

Types of Properties Subject to VAT in Dubai

From the last section, you probably wondered: “Why are the types of properties subject to VAT in Dubai?” Let’s find out!

Residential Properties

Residential properties are what most people imagine when they think of VAT on rental income in Dubai. So, how does it work in this case? Luckily, for the first three years after they’ve been built, residential properties are zero-rated. That means the VAT on residential property rent is 0%.

However, the developers of that property can still reclaim the VAT they paid on construction costs by submitting a VAT return to the FTA.

Once the three years after construction have passed, if the owners of that property try to sell/rent it, they’d be exempt from VAT. In this case, sellers/landlords wouldn’t be able to reclaim the VAT on any maintenance/renovation expenses.

Commercial Properties

Whether it’s offices, warehouses, or hotels, commercial properties are subject to the 5% VAT. In this case, landlords must register their properties for VAT if the annual taxable income exceeds the standard threshold and charge the tenants those 5%.

Mixed-Use Properties

Yes, some properties in Dubai are both residential and commercial. In that case, VAT only applies to commercial units, while residential units are exempt.

How Does VAT Affect the Real Estate Sector?

Obviously, introducing such a tax would have a different impact on the industries it applied to. The question is: What kind of impact did it have?

Residential Section

Everyone was worried when the government first introduced that tax, thinking properties’ prices would get higher. Luckily, it turned out that residential properties are zero-rated when they’re sold in the first three years of their completion, and the following sales/rentals are exempt.

So, for renters and buyers, the tax didn’t change much. Sure, developers pay those 5%, but they can still reclaim them with a VAT return. So, we can’t say that the residential section changed that much.

The only difference is that property owners are negotiating longer lease agreements now, as short-term rentals are treated as commercial rentals and are taxed at 5%.

Commercial Sector

Since VAT on Rental Income in UAE applies to commercial sectors, increasing the sale and rental costs, we can definitely say that it’s had a bigger impact on these types of properties than on the residential side.

With such impact, it’s only natural that landlords follow compliance regulations to the teeth. That includes issuing VAT invoices, filing returns, and keeping detailed records of monthly rents.

Read More: VAT on Property in Dubai

VAT Exemptions for Residential Rental Properties

We’ve covered VAT exemptions in the past few sections. Let’s dive deeper into all the exemption cases in the UAE.

Zero-Rated Properties

As we previously mentioned, properties that have been sold within three years of their construction are zero-rated. That means buyers pay 0% VAT, and the developers can reclaim the VAT they paid on construction costs.

Exempt Follow-Up Sales

Once a property has been sold, all future sales and leases are exempt from VAT. That means landlords aren’t allowed to charge rent on properties or reclaim VAT on maintenance and renovation expenses.

How Much Tax to Pay on Rental Income in the UAE

Here’s the thing: the UAE government doesn’t levy income tax on rental income. However, there are a few taxes and fees that still affect landlords and tenants.

VAT on Commercial Properties: Landlords charge 5% extra on rent. So, if an office costs AED 500,000 a year, its VAT would be AED 25,000.

Corporate Tax on Rental Business: In June 2024, the UAE government introduced a 9% corporate tax on business profits exceeding AED 375,000. That applies to real-estate-related businesses.

Dubai Land Department transfer fee: If you buy a property in the UAE, a 4% Dubai Land Department transfer fee automatically appears. Developers usually pay it up front.

VAT Consultants in Dubai

As you can see, there are a lot of details to keep track of when it comes to VAT on rental income in UAE. It’s easy to make a mistake when it’s your first time or if you’re not well-prepared with all the necessary data from understanding VAT registration fees in Dubai to filing your returns correctly And let us tell you: Making a mistake in VAT will only result in a big fine.

In other words, it’s better to let a professional do it for you. It’ll give you the ease of mind you dream of in these types of processes.

VAT on Rental Income Services by Alsun Bookkeeping and Taxation

When you’re searching for specialists to take over your VAT compliance efforts for you, you’ll find plenty of agencies with various tempting offers. However, none of them offer the same value we do in our work.

After all, Alsun Bookkeeping and Taxation has 10 years of experience in the industry. And not only are we FDA-accredited, but we’re also more affordable than our competitors. Ultimately, we make sure you get the smoothest customer experience in all aspects, be it technical or personal.

Conclusion

VAT on rental income in UAE is full of complex details. You’re more than welcome to try doing it yourself, but you’re more than likely to make a mistake.

That’s why we recommend hiring a professional. And that’s where Alsun Bookkeeping and Taxation comes in. We’ll take this complex process and turn it into a walk in the park. So, give us a call, get your quote, and let us help you legalize your rental transactions.

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