Anyone looking to invest in real estate must consider property taxes when evaluating costs. Dubai offers investors and buyers a range of tax advantages. No direct property taxes are levied on residential properties. This raises the question: When is the sale of a property tax-free, and what costs and fees should be taken into account when investing? Below, we provide an overview of the tax system in Dubai and explain the advantages Dubai offers in terms of real estate and taxes.
Dubai and Its Tax System
Dubai is known as a tax haven for real estate. Owners do not pay property tax on their primary residence. This forms the basis of the tax system. However, property ownership is not entirely free of costs. Various service fees and costs associated with registration with official agencies must be paid.
It is advisable to familiarize yourself with the local tax system, regardless of whether the property taxes are for residential or commercial use. Even if no income tax is due when selling a home, transfer fees, for example, must be paid. This amount is four percent of the property’s value.
Homeowners and renters will continue to be charged a recurring housing fee. This fee is set at five percent of the average rent. Payment of this fee is processed through the DEWA bill.
In summary, the following costs arise, which can be viewed as similar to a property tax and should be taken into account when purchasing and renting:
- Rental Deposit: The standard annual deposit for rental properties is five percent of the rent. This applies to unfurnished properties. For furnished properties, the deposit is ten percent.
- Service Fees: This item includes maintenance fees. These fees must be paid by all property owners in Dubai and are used for the upkeep and maintenance of the residential complex’s common areas.
- Insurance Costs: The expenses associated with insuring a property should not be underestimated. The cost of home insurance varies and depends on the type, size, location, and condition of the property.
- DEWA Fees: Anyone who owns property in Dubai must be registered with DEWA. Fees apply for electricity and water service.
- Broker’s commission: The broker’s commission on the sale of residential real estate is two percent. For lease agreements, the commission is five percent.
- Ejari Registration: Those who register through the Dubai REST app are exempt from VAT, and the fee is 155 AED. For standard registration, plus fees and VAT, the total amount due is 219.75 AED.
Property Tax in Dubai – Benefits
Property owners in Dubai enjoy numerous benefits:
- No property tax is due. This means owners have lower overall costs and can achieve a higher return on rental income.
- There is no tax on rental income. Capital gains are also not subject to tax.
- Rental yields range from five to eight percent and are competitive on an international scale.
- Transaction costs are low. There is no property tax. Transaction costs are significantly lower than in other cities.
- High returns are possible. With attractive returns ranging from five to eight percent, Dubai holds its own well on the international stage.
Myths About Real Estate in Dubai Debunked
There are high hidden costs.
There are a few costs to take into account in order to plan your finances effectively. However, by global standards, these costs are quite moderate.
A high business tax is due.
Corporate income tax was introduced several years ago to tax corporate profits. The rate is nine percent. A five percent value-added tax applies to the sale of commercial real estate.
Dubai imposes high property taxes.
In fact, selling a house may be tax-free. Residential real estate is not subject to property tax, capital gains tax, or income tax.
Renting Out Real Estate in Dubai – Avoiding Tax Evasion
Anyone who is subject to unlimited tax liability in Germany and rents out a property in Dubai must report that income for tax purposes in Germany; otherwise, they are committing tax evasion under German law. This issue went largely unnoticed for quite some time, as there was virtually no exchange of tax data or information between the United Arab Emirates and Germany.
The situation has since changed, and Germany has been engaging in concrete exchanges with the United Arab Emirates on this matter since 2017. To this end, it uses the Common Reporting Standard (CRS), a procedure widely adopted at the international level.
World Income Principle
The reason Germany has jurisdiction over rental income from real estate generated in Dubai is also related to the worldwide income principle. For the German tax authorities, it is fundamentally irrelevant where a person considered to have unlimited tax liability in Germany earns their rental income. If, on the other hand, individuals are subject to limited tax liability, only the rental income earned domestically is taken into account. In this case, the worldwide income principle does not apply, and in practice, this means that individuals registered in Germany can sell an investment property in Dubai and remain tax-exempt.
Unlimited Tax Liability in Germany
There are various criteria for determining unlimited tax liability in Germany.
Residence in Germany
The worldwide income principle applies only if the person in question is considered to have unlimited tax liability. This is the case if the person’s domicile or habitual residence is in Germany. In this context, control of the property is a relevant factor. It is therefore assumed that the person in question has the ability to gain access to the living space. However, whether and how the property is furnished, and whether the person has fulfilled their registration requirement, are not considered relevant for tax purposes.
Habitual Residence in Germany
Habitual residence in Germany also results in unlimited tax liability. When considering the question of when the sale of real estate is tax-exempt, it is also important to keep in mind that one does not need to have a permanent residence in Germany; even if one has been living in Dubai for an extended period of time, one cannot avoid tax liability in the country of origin. A personal interest can exist in many different ways:
- Family members have remained in Germany
- Maintaining Friendships
- Leisure activities practiced in Germany
Demonstrable reasons that do not preclude a return to Germany may subject individuals to tax obligations, even if they no longer maintain a permanent residence in Germany. Occasional visits to friends and relatives and vacation trips are excluded from this provision.
Cross-border workers are subject to the rules governing their habitual residence in their country of residence. This means that all income, regardless of where it is earned, is subject to German income tax. This is referred to as “worldwide income.”
According to Section 21(1), first sentence, item 1 of the Income Tax Act, income regularly derived from the rental and leasing of the following is subject to this law:
- Properties
- Buildings
- Building sections
- Ships
Limited Income Tax Liability
If individuals have neither a permanent residence nor a habitual residence in Germany, the situation is reviewed in accordance with the domestic criteria set forth in Section 49 of the Income Tax Act. If no such circumstances apply, the second stage of taxation may be waived. Income regularly derived from renting and leasing is generally considered domestic income under the limited income tax liability, provided it is subject to § 21 of the Income Tax Act and is not attributable to the Income Tax Act under § 49(1). This includes real property or rights such as trademarks and patents.
Real estate held abroad is not included in the domestic catalog. The reason for this is a lack of enforcement options under domestic law. In cases of limited income tax liability, a foreign tax credit may apply in certain instances pursuant to Section 34c of the Income Tax Act.
Selling Real Estate in Dubai from Abroad
To ensure that the sale of a property in Dubai from abroad goes smoothly, there are a few steps to consider and a specific process to follow.
Seek assistance from a real estate agent
The first step is to secure expert support. It’s important to work with a trusted real estate agent who is thoroughly familiar with the local market in Dubai and can also accurately assess the international market. At Canaletto Sky, we handle all aspects of real estate appraisal and sale. A key advantage is the comprehensive legal advice that is also part of our portfolio, which offers clients the best possible transparency and security.
Grant Power of Attorney
Anyone who cannot be physically present in Dubai at the time of closing the transaction must grant a representative a power of attorney (POA). The POA must be notarized in the home country under the supervision of a notary public. Subsequent confirmation must be obtained from the Embassy of the United Arab Emirates and the UAE Ministry of Foreign Affairs. This ensures the document’s validity locally and allows a local real estate agent or legal advisor to act on behalf of the owner, sign the documents necessary for the sale, and complete the property transfer process.
Preparing the Necessary Documents
To ensure that the process runs smoothly, all documents should be complete. Particular importance is also placed on the title deed and legal proof of ownership. If no questions arise in this regard and there is no need to request and obtain documentation from Germany—which often involves lengthy bureaucratic processes—the sale can be completed quickly.
Rating and Pricing
Realistic and transparent pricing is essential to spark buyers’ interest and ensure that a sale can be initiated and completed in a timely manner. With the help of real estate agents, an analysis of the current real estate market situation can be conducted. Based on the resulting appraisal report, it becomes possible to set a final asking price.
What are the rules for selling German real estate?
If German real estate is sold, it is considered a private transaction, and any profits from the sale are subject to German income tax. When is the sale of real estate tax-free? This is the case if more than ten years have elapsed between the purchase and the sale of the property. The dates recorded in the notary contracts are legally binding for this purpose.
A tax-free sale is therefore possible if: The property is sold no earlier than ten years after purchase and has been used exclusively as the owner’s primary residence throughout that period. Use as a second home or vacation home is also permitted.
Image credit: Depositphotos.com – House 3D (House 3D)
