Key Highlights

• All commercial property sales and leases in the UAE are subject to 5% VAT, with specific exceptions for designated free zones and Transfer of Going Concern transactions.
• When buying commercial property from secondary market sellers, you must obtain a Payment Transaction Number (PTN) through the FTA portal before completing the property transfer with the Land Department.
• VAT registration becomes mandatory when your annual taxable supplies from commercial property transactions exceed AED 375,000, with voluntary registration available at AED 187,500.

The UAE commercial property market continues to thrive, but understanding VAT obligations has become crucial for success. Recent regulatory changes and enforcement measures make compliance more important than ever for property investors, developers, and business owners.

This comprehensive guide covers everything you need to know about VAT on commercial property in the UAE, from basic requirements to advanced planning strategies.

Continue reading this article to learn more. 

Disclaimer: This article is intended for general informational and educational purposes only. While every effort has been made to ensure the accuracy of the information presented based on UAE Federal Tax Authority sources, VAT regulations and implementation guidelines are subject to change. Always cross-verify things before making any decisions.

What Constitutes Commercial Property Under UAE VAT Law

Commercial property encompasses any real estate that doesn’t qualify as residential under Federal Decree-Law No. 8 of 2017. The Federal Tax Authority (FTA) treats commercial properties as “goods” for VAT purposes, making them subject to different rules than services.

1. Official FTA Classifications

The law defines commercial property to include:

• Office buildings and business centers
• Retail shops and shopping malls
• Warehouses and logistics facilities
• Hotels and hospitality properties
• Industrial facilities and factories

2. Mixed-Use Properties

Mixed-use developments require careful VAT treatment. When a building contains both residential and commercial components, you must apportion the consideration between different uses.

For example, if you sell a mixed-use building for AED 1 million where 60% is commercial space, VAT applies only to AED 600,000 (the commercial portion).

3. Gray Areas Requiring Attention

Certain property types need special consideration:

• Hotel apartments: Generally treated as commercial property
• Serviced apartments: VAT treatment depends on specific use and services provided
• Short-term rentals: May be classified as commercial depending on arrangement

Understanding VAT Rates and When They Apply

1. Standard 5% VAT Rate

Most commercial property transactions are subject to the standard 5% VAT rate. This applies to:

• Sales of commercial buildings
•  Leasing of commercial spaces
• Property management services

2. Recent 2025 Updates

The FTA issued Public Clarification VATP040 in March 2025, providing updated guidance on various VAT matters. These clarifications became effective November 15, 2024, following Cabinet Decision No. 100 of 2024.

Key updates include:

• Enhanced documentation requirements for certain transactions
• Clearer guidance on composite supplies
• Updated treatment of financial services related to property

Note: Cross-verify things against UAE official sources before making any decisions. 

The Special Payment Mechanism (SPM) Explained

The Special Payment Mechanism is a critical requirement for secondary market commercial property sales.

1. When SPM Applies

SPM is mandatory when:

• A commercial property is sold by someone other than the original developer
• The transaction involves a non-registered seller or individual seller
• The buyer purchases from a supplier other than the developer

2. Step-by-Step SPM Process

Step 1: Seller Issues Tax Invoice

The seller provides a tax invoice showing the VAT amount and their Tax Registration Number (TRN).

Step 2: Buyer Accesses FTA Portal

Log into the FTA e-Services portal and navigate to “My Payments.”

Step 3: Select Commercial Property Sale

Under “Miscellaneous Payment,” choose “Commercial property sale” from the dropdown.

Step 4: Enter Required Details

• VAT amount from seller’s invoice
• Seller’s TRN
• Commercial property number
• Date of sale
• Relevant Land Department

Step 5: Make Payment and Obtain PTN

Complete payment to receive your Payment Transaction Number.

Step 6: Present PTN to Land Department

Show the PTN to complete property transfer.

Key Exceptions and Exemptions

1. Designated Free Zones

Twenty-three designated zones in the UAE offer VAT exemptions for goods transactions under specific conditions.

Complete List of Designated Zones:

Dubai:

• Jebel Ali Free Zone (North-South)
• Dubai Cars and Automotive Zone (DUCAMZ)
• Dubai Textile City
• Dubai Aviation City
• Dubai Airport Free Zone (DAFZA)

Abu Dhabi:

• Khalifa Industrial Zone
• Abu Dhabi Airport Free Zone
• Al Ain International Airport Free Zone

Important note: Services provided within designated zones remain subject to 5% VAT.

2. Transfer of Going Concern (TOGC)

TOGC allows certain commercial property sales to avoid VAT entirely.

Three Essential TOGC Conditions:

1. Business Transfer: The sale must transfer a business or independent part of a business
2. Taxable Buyer: The purchaser must be VAT registered or eligible for registration
3. Business Continuation: The buyer must continue the same type of business

When these conditions are met, the transaction falls outside VAT scope completely.

Bare Land and Other Exemptions

• Bare land sales: Exempt from VAT regardless of intended use
• Residential property: Generally exempt (except first supply within 3 years)

VAT Registration Requirements for Property Owners

Mandatory Registration Thresholds

You must register for VAT if your taxable supplies exceed AED 375,000 annually. This includes:

• Commercial property sales revenue
• Rental income from commercial properties
• Property management fees

Voluntary Registration Benefits

Consider voluntary registration if taxable supplies exceed AED 187,500 annually. Benefits include:

• Ability to recover input VAT on property purchases
• Professional credibility with tenants and buyers
• Access to input tax credits on maintenance and improvement costs

Non-Resident Landlord Rules

Non-resident property owners must register for VAT regardless of turnover if they make taxable supplies in the UAE.

Practical Compliance Requirements

Documentation and Record Keeping

Commercial property records must be maintained for specific periods:

• Standard VAT records: 5 years minimum
• Capital asset records: 10 years minimum
• Real estate transaction records: 15 years minimum

Essential Documents to Maintain

• Tax invoices for all sales and purchases
• Lease agreements and rental payment records
• Property purchase and improvement invoices
• VAT return submissions and supporting documents
•  Bank statements showing VAT payments

VAT Return Filing

Commercial property income and expenses must be reported in quarterly or monthly VAT returns, depending on your registration type.

Common Mistakes and How to Avoid Them

Top Compliance Errors

1. Incorrect SPM Application

Many buyers fail to use SPM when required, causing property transfer delays.

2. Missing PTN Requirements

Attempting to transfer property without obtaining a Payment Transaction Number.

3. Improper TOGC Claims

Claiming TOGC status without meeting all three essential conditions.

4. Mixed-Use Property Errors

Failing to properly apportion VAT between residential and commercial portions.

Penalty Structure and Costs

VAT violations carry significant financial consequences:

• Late registration: AED 10,000
• Incorrect invoices: AED 2500 per document
• Poor record keeping: AED 10,000 for the first offense, AED 50,000 for repeat violations
• Late filing: AED 1,000 for the first offense, AED 2,000 for subsequent violations

Strategic Planning for Property Investors

1. Cash Flow Management

Factor VAT into your investment calculations:

• Property purchase: Budget for 5% VAT on acquisition cost
• Rental yields: Consider VAT impact on rental income if you must register
• Exit strategy: Plan for VAT on property sales

2. Transaction Structuring

Consider these optimization strategies:

Timing Considerations:

• Coordinate registration timing with property transactions
• Plan major purchases to maximize input VAT recovery

Corporate Structure:

• Evaluate holding properties through VAT-registered entities
• Consider group registration for multiple property companies

Sector-Specific Considerations

1. Real Estate Developers

Developers face unique VAT considerations:

• Construction phase: Input VAT recovery on development costs
• Off-plan sales: VAT applies when ownership transfers, not upon initial payment
• Mixed-use projects: Careful apportionment between residential and commercial components required

2. Property Management Companies

Service providers must consider:

• VAT registration based on management fee income
• Tenant billing procedures for VAT collection
• Input VAT recovery on operational expenses

Frequently Asked Questions

1. Do I need to pay VAT when buying commercial property from an individual?

Yes, if the individual is VAT registered and the property is commercial. You’ll need to use the Special Payment Mechanism if the seller isn’t the original developer.

2. What happens if the seller is not VAT registered?

You still need to pay 5% VAT through the Special Payment Mechanism. The unregistered seller may face penalties if they should have been registered.

3. How do I calculate VAT on commercial rent?

Apply 5% to the base rent amount. If you’re VAT registered and use the property for business, you can recover this as input VAT.

4. Can I recover VAT on a commercial property purchase?

Yes, if you’re VAT registered and use the property for taxable business activities. You can claim the VAT as input tax in your VAT returns.

5. What is PTN, and when do I need it?

The Payment Transaction Number is proof that you’ve paid VAT to the FTA. You need it for any secondary market commercial property purchase using SPM.

6. How does VAT work in Dubai free zones for property?

Property in designated free zones may be exempt from VAT for goods transactions, but services remain taxable at 5%.

7. What records must I keep for commercial property VAT?

Standard VAT records for 5 years, capital asset records for 10 years, and real estate records for 15 years.

Looking Ahead: Future Developments

The UAE continues to refine its VAT system based on practical experience and international best practices. Stay informed about regulatory changes through the FTA’s official communications, and consider working with qualified tax advisors for complex transactions.

Disclaimer: Remember that VAT rates and regulations can change. Always verify current requirements with official government sources or qualified professionals before making major property decisions.

Book your free consultation call today with the experts of JSB Incorporation to discuss more about commercial property VAT.