VAT on Commercial vs. Residential Leases in the UAE: A 2026 Guide for Landlords

VAT on Commercial vs. Residential Leases in the UAE

Leasing of real estate remains one of the most misinterpreted areas under the UAE VAT Laws. Even in 2025 also, many of the landlords applied wrong treatment of VAT on leases, which in turn results in mistakes in invoicing, disallowance of Input Tax Credits, penalties and FTA audits.

The treatment of VAT on leases of real estate in the UAE depends primarily on the nature of the property, commercial vs. residential and how the property is being used, as well as how it is described in contracts.

This blog explains the Treatment of VAT on commercial and residential leases in the UAE, along with practical examples that enable landlords to stay compliant.

Disclaimer: The examples and scenarios used in this blog are fictional and created solely for educational purposes.

Legal Framework for VAT on Leasing in the UAE

Treatment of VAT on real estate leasing is governed by:

• Federal Decree-Law No. 8 of 2017 on VAT

• Cabinet Decision No. 52 of 2017 (VAT Executive Regulations)

• FTA Public Clarifications and Real Estate VAT Guides

The key principle:
Treatment of VAT primarily depends on how the property is used, rather than the ownership or contract terms.

VAT on Commercial Property Leases

 VAT Treatment

• Standard-rated VAT at 5%

• Applicable to leasing of:

  • Office spaces

  • Shops and retail outlets

  • Warehouses

  • Industrial units

  • Labour camps

  • Commercial villas used as offices

Landlord Obligations

• Collect 5% of VAT on rental payments

• Issue a Tax invoice as per the requirements of the UAE VAT Law

• Report VAT on taxable supplies while filing the return

• Keep the records of lease agreements and supporting invoices

Example – Commercial Lease

A person leases his warehouse to a logistics company for AED 200,000 per year.

• Should collect VAT at 5% = ie AED 10,000

• Tenant required to pay AED 210,000, including VAT

• The output VAT should be reported and paid to FTA while filing the return

VAT on Residential Property Leases

VAT Treatment

• Exempt from the applicability of VAT

• Applies to:

  • Apartments

  • Villas

  • Staff accommodation

  • Housing for students

  • Residential buildings

The exemption applies only if the concerned property is being used for residential purposes.

Important Note

Since leasing of residential property is VAT-exempt:

• There is no need to charge VAT on rent

• Not able to claim input tax credit on exempted supplies

Example – Residential Lease

A landlord rented an apartment to a family for AED 120,000 per year.

• This transaction is exempt from VAT

• Input VAT on expenses relating to this property cannot be recovered as it is an exempted supply

Mixed-Use Properties: A Common Pitfall

Many properties in the UAE are being used for both residential and commercial purposes.

Examples:

• A Villa rented as an office space

• Apartment used for short-term accommodation

• Building with shops on the ground floor and residential flats above

VAT Treatment:

• 5% VAT will be applicable on commercial portions

• And residential portions are exempt from VAT

Example – Mixed Use

A building includes:

• Retail shops on the ground floor are commercial

• Apartments above (residential)

➡ VAT is charged only on leases of shops

➡ Residential leases remain exempt from VAT

Common VAT Mistakes by Landlords

• Treating all lease transactions as exempt from VAT

• Not registering for VAT, considering this as a residential lease

• Claiming input tax credit on exempt residential income

• Incorrect VAT treatment for serviced apartments

These mistakes often lead to FTA audits and penalties.

Serviced Apartments & Short-Term Rentals

VAT Treatment:

• Generally taxed at 5% VAT

• Considered as a commercial lease, not a residential lease

This including:

• Services like hotel accommodation

• Short-term holiday rentals

• Furnished apartments, along with cleaning and concierge services

VAT Registration for Landlords

A landlord must register for VAT if they:

• Total taxable supplies (commercial leases) exceed AED 375,000 in 12 months

VAT registration is not required if:

• There is leasing of residential properties only

• And no taxable supplies

Input VAT Recovery for Landlords

Incorrect treatment of Input VAT can lead to VAT adjustments and penalties.

Best Practices for Landlords in 2026

• Maintain proper documentation showing the correct usage of the property

• Keep separate invoicing for mixed-use properties

• Do a regular review of VAT Compliance

• Consult for professional advice before going for VAT registration

How a Flyingcolour Tax Consultant Can Help

Flyingcolour Tax Consultant assists landlords and real estate companies on:

✔ Classification of properties and it’s VAT treatments

✔ VAT registration & deregistration requirements

✔ Structuring of the lease and its correct invoicing

✔ Input VAT recovery optimisation

✔ FTA audit support

Frequently Asked Questions (FAQs)

1. Is VAT applicable to residential rent in the UAE?

No. Leasing of Residential property is exempt from VAT.

2. Are commercial leases always subject to VAT?

Yes, commercial leasing is always subject to a standard rate of 5%.

3. Can a villa rented as an office be VAT-exempt?

No. VAT depends on the actual usage of the property, not on the type.

4. Can landlords recover VAT on maintenance costs?

Yes, only if the property is used for taxable (commercial) leasing.

5. Do landlords need VAT registration if they lease only residential properties?

No need to register for VAT,  provided they have no taxable supplies.

To learn more about VAT on Commercial vs. Residential Leases in the UAE: A 2026 Guide for Landlords, book a free consultation with one of the Flyingcolour team advisors.

Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.