Residential property in the UAE, some financial services, undeveloped land and local transport will be exempt from value-added tax (VAT), which will be introduced at a rate of 5 per cent on January 1 next year, the Ministry of Finance said on its website.
“Supplies (including sales or leases) of commercial properties will be taxable at the standard VAT rate,” the ministry said.
“On the other hand, supplies of residential properties will generally be exempt from VAT. This will ensure that VAT would not constitute an irrecoverable cost to persons who buy their own properties.”
The implementation of the GCC-wide tax is expected to boost GDP by about 1.5 per cent with the implementation of the 5 per cent VAT, the IMF has said.
In the UAE, VAT could generate Dh12 billion in its first year and Dh20bn in its second year, according to Sultan Al Mansouri, the Minister of Economy.
Most insurance, except for life insurance, and local passenger transport will be exempt, the ministry added.
The ministry also clarified which goods and services will be zero-rated. When businesses have zero-rated services and goods they can reclaim from the government any VAT they have paid on costs.
Businesses exempt from VAT will not be able to recover the tax incurred on the cost of an item or a service that is not exempt from the government.
The items that will be zero-rated include: export of goods and services outside the GCC, international transport, supplies of certain sea, air and land means of transport, supply of education services, supply of healthcare services and certain investment grade precious metal such as gold and silver of 99 per cent purity.
Fee-based financial services will be taxed, but margin-based products are expected to be exempt.
The list of exemptions and zero-rated good and services are broadly in line with expectations, according to Jeremy Cape, a London-based tax and public policy partner at law firm Squire Patton Boggs.
"The approach in the UAE and indeed the rest of the GCC, has been to make the exempt category very narrow. They have expanded the zero rate category," said Mr Cape. "There are categories that are neither exempt nor zero-rated which you would expect to be in other countries such as basic food, books and children clothes and footwear."
The fact that the UAE has expanded the zero-rated category means that consumers and businesses will be the main beneficiaries and the government would have to foot the cost.
"In effect by making these supplies zero rated there is a transfer of revenue from the government to businesses and [to] consumers of these services," said Mr Cape.
One sector that is expected to suffer from the VAT implementation is tourism, because tourists will not be exempt from paying the tax. Other countriessuch as the UK offer tourists tax refunds.
"Tourists are a significant source of revenue for the UAE and will pay VAT at the point of sale," the ministry said. "Nevertheless, we have set the VAT rate deliberately low so that VAT is a limited burden on all consumers."
The UAE has yet to publish its VAT law, which will clarify details about the implementation of the tax. Businesses will be looking to get more clarity on certain clauses of the law to avoid falling into legal traps.
"We only have five-six months before it [the VAT] comes in and we ought to have some element of certainty and some element of dialogue with the government on how we are going to interpret those very complex areas of uncertainty," said Mr Cape.