Commercial Property VAT Treatment
General Rule: Standard-Rated at 5%
The sale and rental of commercial property is standard-rated at 5%. The owner charges VAT and can recover input tax on related expenses.
What is Commercial Property?
Commercial property includes:
- Office buildings and office space
- Retail shops and shopping malls
- Warehouses and industrial buildings
- Hotels and serviced apartments
- Commercial floors in mixed-use buildings
Sale of Commercial Property
When commercial property is sold:
- The seller charges 5% VAT on the sale price.
- The buyer can recover the VAT as input tax (if registered and the property is for business use).
- The seller can recover input tax on the original purchase/construction costs.
Rental of Commercial Property
When commercial property is rented:
- The landlord charges 5% VAT on the rent.
- The tenant can recover the VAT as input tax (if registered and the property is for business use).
- The landlord can recover input tax on maintenance, repairs, and management costs.
Mixed-Use Buildings
For buildings with both commercial and residential units (e.g., a mixed-use tower with offices and apartments):
- Commercial units: standard-rated at 5%.
- Residential units: exempt (or zero-rated if first supply within 3 years).
- Input tax on shared costs (e.g., common area maintenance, building insurance) must be apportioned.
Sale of Commercial Bare Land
Unlike residential bare land (exempt), the sale of commercial bare land may also be exempt. However, if the land is sold with a commercial building, the building portion is standard-rated.
Worked Example
A company sells a commercial office building for AED 10M + 5% VAT = AED 10.5M. The buyer (a registered business) pays AED 500,000 VAT and recovers it as input tax. The seller recovers input tax on the original construction costs.