Real Estate Investment Trusts (REITs) play an increasingly important role in the UAE’s investment landscape. However, the VAT treatment of REIT activities is often misunderstood, particularly where different property types and services are involved.

In the UAE, VAT treatment for a REIT is not determined by its legal form alone. Instead, it depends on the nature of the underlying property and the type of transaction being carried out. This blog breaks down the VAT position clearly and highlights how it differs from Corporate Tax treatment.

VAT Treatment Based on Property Type

Commercial Property (Standard Rated – 5%)

Sales and leases of commercial properties such as offices, warehouses, retail units, and industrial facilities are subject to 5% VAT.

If a REIT generates taxable supplies from commercial property and exceeds the mandatory VAT registration threshold of AED 375,000, VAT registration becomes compulsory.

Examples include:

• Commercial rental income
• Sale of office or retail units
• Leasing of warehouses or logistics facilities

Residential Property (Exempt / Zero-Rated in Limited Cases)

The VAT treatment for residential property is different:

• Sale or lease of residential property is generally VAT-exempt
• First supply of a new residential property within three years of completion is zero-rated, not exempt

Zero-rating means:

• No VAT is charged to the customer
• The REIT can recover input VAT related to that supply

This distinction is critical for cash flow planning and input VAT recovery.

Bare Land (VAT Exempt)

The sale or lease of bare land is VAT-exempt, provided it does not include buildings or civil works. As a result, VAT incurred on costs directly related to exempt supplies is generally not recoverable.

VAT on Related REIT Services

REIT operations often involve additional services, including:

• Property management
• Brokerage and leasing services
• Advisory and administrative support

These services are subject to 5% VAT, regardless of whether the underlying property is residential or commercial.

Input VAT Recovery: What REITs Should Watch

A VAT-registered REIT can recover input VAT only to the extent it relates to taxable or zero-rated supplies.

Key points:

• Input VAT related to commercial property is generally recoverable
• Input VAT linked to exempt residential activities is restricted
• Mixed-use portfolios require input VAT apportionment calculations

Improper allocation of input VAT is a common audit risk area for REITs.

VAT Treatment of Fund Management Services

Recent amendments to the UAE VAT Executive Regulations have brought clarity to fund management services.

• Management of REITs is now treated as VAT-exempt, aligning it with other regulated investment funds
• As a result, fund managers cannot recover input VAT incurred on their own costs

While this reduces VAT leakage at the fund level, it may increase operational costs for fund managers.

VAT vs Corporate Tax: An Important Distinction

VAT and Corporate Tax operate independently in the UAE, and exemption under one does not guarantee exemption under the other.

Corporate Tax Treatment of REITs

• A REIT that qualifies as a Qualifying Investment Fund may be exempt from UAE Corporate Tax
  
• However, from 1 January 2025, corporate (juridical) investors in an exempt REIT may still be taxed on a pro-rata basis on 80% of immovable property income, unless distribution conditions are met within the prescribed timeframe

This makes structuring, distributions, and compliance timing critical for REIT investors.

Why This Matters for REITs and Investors

The VAT treatment of REITs affects:

• Pricing and rental strategies
• Input VAT recovery and cash flow
• Compliance risk during FTA audits
• Alignment between VAT and Corporate Tax reporting

Misclassification of property type or incorrect VAT recovery can result in penalties, reassessments, and interest exposure.

Final Thoughts

REITs operate at the intersection of real estate, investment regulation, VAT, and Corporate Tax. While VAT rules may appear straightforward on paper, their application in practice requires careful analysis of each property, transaction, and service stream.

At The Capital Zone, we assist REITs, fund managers, and investors with:

• VAT registration and compliance
• Input VAT recovery and apportionment
• Fund structuring and tax efficiency reviews
• Alignment between VAT and Corporate Tax positions

If you are operating or investing in a UAE REIT and need clarity on VAT or Corporate Tax exposure, professional guidance can help mitigate risk and optimize outcomes.