Real estate usually occupies a special place in VAT legislation benefiting from deviating rules, introducing complexity in the operations. Instead of following the general rules, often VAT is applicable in a different country, or the transaction may be exempt from VAT or subject to a zero percent rate, instead of just subject to VAT.

For instance, regardless where vendors or customers are located, for VAT purposes sales or purchases with respect to a building will mostly be subject to VAT in the country where the building is located.

Whether the transactions will actually be taxed will depend on the domestic tax legislation of the country where the building is located. The Member States of the GCC are allowed to implement VAT with respect to real estate in a different way and are expected to do so. The UAE is expected to zero rate the first sale of a new building whereas KSA is not expected to do so. Both would exempt residential rent and tax commercial rent.

Property developers or rental companies face costs which generally bear 5% VAT. Their output however will not necessarily bear VAT, as shown in the examples above. 

Specific agreed payment terms need to be taken into account when assessing the application of VAT, since working capital will be particularly hit. Indeed, VAT may be due before the customer has actually paid.

As mentioned above, the lease or letting of property could be exempt from VAT in certain circumstances. The developer or constructor may also wish to change the destination of the developed goods. Mall managers also have their specific issues because of the specific terms in the agreements they conclude with their tenants.

Taking into account the date set for the implementation in KSA and the UAE, (1 January 2018), it is high time for real estate businesses to determine their strategies for the implementation.