UAE’s overseas property tax may push rents up

Wam

• Non-resident investors now taxed on UAE property income
• Move is part of UAE’s new corporate tax scheme
• Residential rents in Dubai rose 26% in the year to April

The introduction of a tax on income from UAE property held by non-residents could cause rents to creep up as owners pass on the increment to tenants, experts have told AGBI. 

“The rental market is based on supply and demand, so if there’s less supply and more demand at any point, landlords can ask for a bit more money [from occupiers],” said Paul Kelly, operations director of Dubai real estate agency Allsopp & Allsopp. 

“If there’s too much supply versus demand, they can’t. The market will dictate the returns possible.”

Overall, it is unlikely to discourage investors from buying property in the UAE, Priyanka Naik, counsel at tax advisory practice Aurifer, said.

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“We believe the decision only aims to create a level playing field between domestic and foreign real estate companies and hence should not be a major deterrent to [investing in] the UAE real estate industry,” Naik said.

“It appears to be inspired by international tax practices, where income derived from immovable property is generally taxed in the state in which that property is located.” 

The new tax is part of the UAE’s corporate tax law that came into effect this month. Since June 1 businesses in the emirates have been liable to pay corporation tax of 9 percent on taxable profits of more than AED375,000 ($102,000).  

The property element, detailed by UAE state news agency Wam, will apply to foreign companies and other legal entities that hold real estate in the emirates, but not to individuals – “provided it is not a licensed business activity”.  

And real estate investment trusts – REITs, companies set up to own and operate income-generating property – can apply for an exemption, Wam said. 

OECD drive

The introduction of corporate tax in the UAE is in large part a response to the Organisation for Economic Cooperation and Development (OECD)’s global drive to crack down on tax avoidance. It is implementing a minimum tax level of 15 percent for companies with revenues over $804 million.

The UAE’s move has prompted fresh demand for tax accountancy services – a profession that had already been buoyed in the GCC when countries began introducing VAT in 2018.

The Association of Chartered Certified Accountants told AGBI last week it had recorded a 40 percent increase in tax roles in the UAE last year compared to 2021.

Last week the UAE government announced that some overseas property investors would be liable to pay the tax.

“Foreign companies and other non-resident juridical persons will be subject to corporate tax on income derived from real estate and other immovable property located in the UAE and will be required to register there,” Wam reported

The tax will apply both when real estate is held for investment purposes and as part of an entity’s business activities – for example, if a foreign company owns its UAE office building. 

According to experts, the tax could push up rents at a time when they are soaring in some parts of the emirates. In Dubai, residential rents increased by 26.3 percent in the 12 months to the end of March, driven by high demand, tight supply and a buoyant economy, according to CBRE.

In Abu Dhabi, the changes were less marked. Average apartment rents dropped by 0.7 percent and villa rents grew by 1.1 percent.

Impact will vary 

The exact impact of the tax on rental rates will vary from location to location, but it is unlikely to dampen foreign investment demand, the experts agreed. 

“In certain prominent communities in Dubai, there is a possibility of price growth, particularly in the price segment above AED20 million, which has experienced a notable rise in demand and transaction activity,” John Lyons, managing director of Espace Real Estate, said.

“The impact on pricing and demand will largely depend on the country’s overall attractiveness.

“Dubai, for example, offers one of the safest and most stable business environments, robust infrastructure and a productive environment for conventional businesses. 

“These factors are likely to continue outweighing the relatively minor tax burden, and maintain investor appetite.”

“[Corporation tax] is the norm in countries all over the world, and the rates introduced in the UAE are far lower than most,” added Allsopp & Allsopp’s Kelly.

He said more than 20 percent of his company’s total sales in May were to investors from the UK, where corporation tax is 25 percent. 

UK property typically offers lower investment yields of around 3-5 percent a year, compared with 8-9 percent in Dubai. Investors in the UK are taxed up to 50 percent of their income and face capital gains tax, too, he added. 

“Dubai remains a tax-free destination for real estate investors and those with property income in their portfolio structured under foundations, for example,” Kelly said. 

Swapnil Pillai, associate director of research and advisory at Savills Middle East, said the tax “would have implications for corporate real estate investors, but limited information is available at this stage”.

There is no known minimum threshold or relief, for example, meaning even a single transaction of real estate income in the UAE could trigger liability. 

It is also unclear whether “the treatment of indirect real estate income earned by foreign companies from UAE real estate, such as sales commissions, brokerage, design fees and so on” requires registration by those firms, and how the tax collection will be administered, Aurifer’s Naik said.