The current tax scene in Dubai:
The city of Dubai has gained a reputation as a tax haven, attracting investors and developers with its favourable tax environment. However, the future of real estate taxation in Dubai is undergoing potential changes that could significantly impact the sector. One significant development is the introduction of a federal corporate tax in the UAE, which is scheduled to be implemented in June 2023. This change has sparked concerns and uncertainties regarding its effects on the real estate industry. If you are interested in investing in this field, it would be wise to delve into these potential changes in real estate taxation and understand their implications for investors and developers in Dubai.
Recently Dubai’s current tax landscape is characterized by several key elements. One significant aspect is the implementation of a 5% Value Added Tax (VAT) on commercial property sales and leases since January 2018. Although residential properties are typically exempt, there is ongoing consideration regarding the potential extension of VAT to specific residential properties. Notably, rental income from residential properties is currently not subjected to taxation, although discussions have emerged regarding the possibility of imposing taxes on high-value and non-primary residences. Furthermore, the government is actively emphasizing the importance of enhanced compliance and reporting requirements, aiming to enhance transparency and combat tax evasion.
Changes in the tax scene:
The UAE’s new federal corporate tax imposes a 9% rate on taxable net income over AED375,000 for companies. It applies to businesses in Dubai and the UAE, requiring them to pay a 9% tax on income above the threshold. This tax change aims to enhance economic stability and generate more revenue for public services and infrastructure development. The proposed tax rate is in line with global low-tax hubs, ensuring competitiveness. Multinational corporations that meet the criteria of the OECD’s Base Erosion and Profit Shifting initiative will be subject to a distinct tax rate.
Effects of the new changes in the tax scene in Dubai on the real estate
Implications for businesses and individuals:
The implementation of the new corporate tax will have a direct impact on businesses, including those operating in the real estate sector. However, individual investors in real estate will continue to be exempt from taxation, and the returns and income of foreign investors in real estate will also remain unaffected. Despite this, businesses may face a reduction in post-tax profits, leading them to seek different strategies to mitigate the impact of the tax.
Impact on residential, office, retail, and industrial segments:
Residential segment
With individuals being exempt from corporate tax, it is anticipated that demand will remain stable in the residential sector. However, developers might consider increasing prices to offset the impact on their businesses.
Office segment
In the short term, demand in the office segment could be influenced by business decisions regarding office spaces and rentals. However, in the long term, the impact is expected to be minimal due to the UAE’s strong competitiveness as a business destination and recent initiatives aimed at stimulating demand for office spaces.
The retail segment
The corporate tax is expected to have a notable impact on the retail segment, affecting rent payments and demand for retail properties. Mall owners may face difficulties in raising rent due to the financial challenges businesses may experience as a result of the tax.
In the industrial segment
The introduction of corporate tax may lead to lower capital investments, subsequently impacting demand.
Benefits of the changes in the tax scene:
Despite the potential challenges, the introduction of corporate tax could bring some benefits.
Greater transparency to business operations.
The improved transparency brought about by these measures would be advantageous for banks when assessing creditworthiness, potentially leading to a decrease in the cost of capital for various business operations.
Increased capital
The additional tax revenue contributing to the boost in state finances may lead to an increase in government capital expenditure, particularly in infrastructure projects.
Attracting more investor
The increased capital can potentially attract both domestic and foreign investments, ultimately benefiting the real estate sector and leading it to more bloom.
Final Summary
In summary, the real estate sector is on the verge of significant transformations due to the introduction of the new tax law. While there may be concerns about higher prices and increased costs in the short term, a more thorough analysis of the market reveals a positive outlook in the long run. By gaining a deeper understanding of the implications, savvy investors and industry participants can identify the potential advantages that arise from these changes and adjust their strategies accordingly.
