Value Added Tax (VAT) remains one of the most important — and often misunderstood — elements of commercial property transactions in the UAE. While a standard 5% VAT applies to most sales and leases, the treatment varies sharply from residential property, and applying the wrong rules can lead to delayed transfers, blocked refunds, and significant penalties. Understanding how VAT works across sales, leases, Designated Zones, and mixed-use developments is critical for ensuring smooth transactions and accurate financial planning.
How VAT Works on UAE Commercial Property
Commercial property sales — including offices, warehouses, and retail units — are generally subject to 5% VAT. When a non-developer sells commercial real estate, the Special Payment Mechanism (SPM) may apply, requiring the buyer to pay VAT directly to the Federal Tax Authority before title transfer. Leases of commercial units also attract 5% VAT, which VAT-registered tenants can usually recover. In contrast, residential property is zero-rated only on first supply (within three years of completion) and exempt thereafter, meaning VAT recovery is normally blocked.
When VAT Does Not Apply
Several property transactions fall outside the scope of VAT. A Transfer of a Going Concern (TOGC), where a fully leased property is sold and the buyer continues the same leasing business, may be VAT-free if FTA conditions are met. Certain Designated Zones can also qualify for outside-scope treatment on property sales or leases, though real-estate services inside these zones remain taxable. Developers of mixed-use projects must apportion VAT correctly between commercial (taxable) and first-supply residential (zero-rated) portions to avoid clawbacks and compliance issues.
Mainland vs Free Zone VAT Treatment
Only officially listed Designated Zones receive special VAT treatment. Standard free zones follow normal VAT rules: 5% on commercial sales and leases, and zero-rated or exempt rules for residential depending on the supply. Businesses operating across multiple zones must assess each property individually, as VAT treatment depends on location and the nature of the supply.
Compliance Essentials for Property Owners
Landlords — including non-resident owners — must register for VAT when making taxable supplies, with no threshold for non-residents. VAT invoices must include the TRN and detailed supply information, and records must be retained for 15 years. Incorrect zero-rating, TOGC misclassification, or missing SPM documentation are common triggers for FTA audits and penalties.
What Foreign Investors Should Prioritise in 2025
VAT planning plays a crucial role for overseas buyers. Non-resident commercial landlords must register immediately, and most will not qualify for the Business Visitors Refund Scheme. Structuring a sale as a TOGC — or occasionally selling shares in a property-holding company — may reduce VAT exposure if the conditions are right. Recent updates, including Cabinet Decision No. 100 of 2024, strengthened definitions around composite supplies and property rights transfers, making professional guidance more important than ever.
