Zero-Rating the First Supply of Residential Property in the UAE: Key Considerations for Owners and Developers
The VAT treatment of residential property in the UAE plays a crucial role in determining financial outcomes for developers and property owners. A property may be zero-rated, exempt, or in some cases, subject to the standard five percent VAT. This classification directly affects whether VAT on construction and operational expenses can be recovered and whether businesses might encounter compliance issues later on. One rule in particular stands out as especially important: the VAT treatment of the first supply of a residential building.
1) Legal Framework:
As per Article 45/9, of UAE VAT Decree-Law No. 8 of 2017, the first supply of a residential building (by sale or lease) made within 3 years of its completion is zero-rated (0%).
Under Article 46 of the same Decree-Law, subsequent supplies of residential buildings are exempt from VAT (unless they qualify under Article 45).
The term residential building is further defined in Article 37 of the Executive Regulations of the federal decree law No.8 (Cabinet decision No. 100 of 2024), which clarifies that properties designed for people to live in, such as villas and apartments are considered residential. However, the article specifically excludes hotels, motels, and serviced apartments where additional services such as housekeeping and reception are provided. These are classified as commercial hospitality properties and are subject to the standard 5% VAT.
This distinction is critical: applying zero percent VAT on the first supply generally allows developers to recover input VAT incurred during construction, while supplies that are exempt block such recovery.
2) Practical Application:
According to Article 45/9 of the VAT decree – law No. 8 of 2017, the three-year eligibility window for zero-rating is measured from the date of completion of the building. This date is usually evidenced by a completion or handover certificate, but in certain cases, first occupation may also be considered as completion.
If the first sale or lease occurs within this three-year period and the required evidence is kept, the transaction is zero-rated. Later on, any resale or lease renewal after three years is treated as exempt under Article 46 of the Decree-Law.
Where a property includes hotel-like services, it is not considered a residential building under Article 37 of Cabinet decision No. 100 of 2024, and the supply must be taxed at 5%.
3) Common Errors to Avoid:
One frequent error is misclassifying serviced apartments as residential. The Federal Tax Authority (FTA), through Public Clarification VATP040 (2025), has highlighted this issue, warning that such misclassification can result in underpaid VAT and penalties.
Mixed-use developments, where some units are purely residential (exempt/zero-rated) and others are serviced (5%), create complex partial exemption scenarios. For large assets, the Capital Assets Scheme under Article 57 of the Executive Regulations of the federal decree law No.8 (2017) applies, requiring adjustments to VAT recovery over a 10-year period.
4) Documentation and Invoicing:
To justify zero-rating under Article 45/9, businesses should retain the following records:
• Evidence of completion or first occupation (completion certificate, utility connections, or occupation evidence).
• Sales or lease agreements.
• Tax invoices clearly showing 0% VAT.
• Input VAT records tied to construction and project costs.
If an error occurs, such as applying 5% VAT instead of 0%, the correction should be made by issuing a credit note or filing a voluntary disclosure under the Tax Procedures Law.
5) How Our Firm Supports Real Estate Clients:
We assist clients in the real estate sector in the following ways:
• Classification analysis: Issuing written legal consultation on whether a property falls under Article 37 residential or must be treated as serviced.
• Contract design: Drafting contracts and invoicing systems that correctly apply zero percent VAT under Article 45/9 to first supplies and preserve input VAT recovery.
• Capital Assets Scheme compliance: Setting up methods for Article 57 tracking and partial exemption calculations to reduce VAT claw-back risks.
• Regulatory support: Managing voluntary disclosures, responding to FTA audits, and resolving issues related to VATP040 misclassifications.
Conclusion
For property developers and owners, VAT treatment hinges on three critical elements:
1. The classification of the property under Article 37 of the Executive Regulations of the federal decree law No.8 (Cabinet decision No. 100 of 2024);
2. The timing of the first supply under Article 45/9 of Decree-Law No. 8 of 2017;
3. The quality of documentation supporting the zero-rating.
By securing these, businesses protect their right to recover input VAT, avoid penalties, and ensure compliance while maintaining cash flow.
Copyright: Dr. Mohammed Hassan Al Raeesi Advocates & Legal Consultants retains all intellectual property rights to this content. No third party may use, copy, or modify any part of it without prior permission and without proper attribution to our firm.
Disclaimer: This is a conceptual framework intended for thought leadership and does not constitute legal or financial advice. For professional evaluation of your company’s financial and ESG governance policies, please contact our firm.
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