The UAE Ministry of Finance recently released additional information on the VAT mechanism, which will be implemented from 01 January 2018 in the UAE. The Ministry of Finance confirmed that certain financial services, residential services, bare land and local passenger transport will be exempted from VAT. These exempted sectors will be further defined in the upcoming VAT legislation.
The UAE Government decided that the VAT treatment of real estate will depend on whether it is a commercial or residential property. Supplies (including sales or leases) of commercial properties will be taxable at the standard VAT rate (i.e. 5%).
As regards to supplies of residential properties, they will generally be exempted from VAT. The aim of this exemption is to ensure that VAT would not constitute an irrecoverable cost to persons who buy their own properties. The Ministry of Finance also announced that in order to ensure that real estate developers can recover VAT on construction of residential properties, the first supply of residential properties within 3 years from their completion will be zero-rated.