Applicability of VAT on Real Estate Transactions, in The Kingdom of Saudi Arabia

Ganesh NairGanesh Nair    25 March 2020
Applicability of VAT on Real Estate Transactions, in The Kingdom of Saudi Arabia

March is that month of the Calendar, where we all are occupied to its fullest, and the work is at its peak, however we shall remember March 2020 for all the wrong reasons.  'Stay at home’ is not only the Order of the day, but also a survival mantra to see the bright tomorrow.

I always believed ‘Whatever happens is for good’, however, that belief took a strong beating this time around.

Director of GCC Fintax, Ms. Anu Goel rightly said, as a professional these are challenging times and we must disseminate the information to keep ourselves updated. 

Taking a cue, we shall discuss the applicability of VAT on Real Estate Transactions in KSA.

VAT is applicable on the Sales of any Property, be it Commercial, Residential or Bare land.  However, the VAT Treatment has been categorized in two parts i.e. Residential Real Estate and Commercial Real Estate.

A) Residential Real Estate (‘RRE’)refers to property intended for use as a Residence and is defined for VAT purposes under KSA VAT Law.

RRE further has been categorized in two parts i.e. Sale of RRE and Rental of RRE.  We shall discuss each below:

1) Sale of RRE by Developers – The Sale of RRE by Developers would be subject to VAT @5%.  The developer shall raise the Tax Invoice thereby charging VAT.

However, the eligible Saudi Citizens can get a maximum Refund of SAR 42,500 (VAT @5% of SAR 850,000) from the Ministry of Housing, of such VAT paid, basis the issuance of Royal Order No. A/86.  The criteria for such refund of VAT paid are as under:

  1. Sales of Residential Properties only;
  2. Sales to Saudi Citizens only;
  3. The First House that the Saudi Citizen has purchases (as is certified by the Ministry of Housing).

So, in order to qualify for a maximum VAT Refund of SAR 42,500 it is mandatory to pass the mentioned criteria.

2) Sale of RRE by Individual – Note that Sale of RRE by Individual would fall outside the VAT Scope, if prior to such sale, the RRE was used or intended for use as a permanent dwelling by the Person or by a relative to the 4th degree.

Relative to the 4th degree Includes Parent or grandparent, child or grandchild, sibling, aunt, Uncle, Nephew, or Niece, cousin, a spouse, or a brother in law / sister in law).

So, if an individual is planning to sell his RRE, where the individual or related person occupied the RRE, would not be subject to VAT.

However, if the Sale of RRE by an Individual is his economic activity, then such supplies will be subject to VAT provisions.

3) Rental of RRE – Rental of RREis exempt from VAT, provided the property is designed for Human Occupation and is intended for use as a primary residence.  Usually, non-furnished accommodations for longer period of usage, will attract such exemption from VAT.

As the VAT is exempt on the supply side, no corresponding Input Tax will be eligible to the business, on expenses met out in relation to such residential units.

Any additional services provided in connection with the Rental of RRE would be treated separately from VAT standpoint and will not be considered as Bundled supply.  Such additional services will be subject to VAT @5%.

Note that, temporary accommodations such as Hotels, motels, Serviced apartments, guest houses, Villas, Lodges etc., shall not be considered as RRE and will be subject to VAT @5%.

B) Commercial Real Estate (‘CRE’) – refers to Real Estate used for Business purposes or any other Non-Residential purposes, note that CRE has not been defined for VAT purposes under KSA VAT Law.

Applicability of VAT for CRE is straight forward from taxability point of view.  If an Individual as part of his Economic activity, either Sells or rents the commercial property, such supplies will be subject to VAT @5%. 

Summary:

   

Description VAT Treatment Remarks
Sale of RRE by Developers Subject to VAT Exemption upto SAR 42,500 can be claimed by Customer from Ministry of Housing, subject to the criteria’ discussed above.
Sale of RRE by Individual Out of Scope of VAT If Prior to such Sales, the RRE was used as Permanent dwelling by the Individual or related person.
Sale of RRE by Individual Subject to VAT If Such Sales, are for Economic Activity.
Rental of RRE VAT Exempt Note that, Input Tax paid on Expenses cannot be claimed by Business in the VAT Returns.
Rental of RRE by Serviced Apts., Hotelsetc. (short stay) Subject to VAT Business are required to raise Tax Invoice, andmay claim the Input Tax on Expenses, other than the blocked ones.
Commercial Real Estate Sell or Rental Subject to VAT  

Note that VAT Treatment of Real Estate Financing arrangements like Murabaha, Ijara etc., has not been discussed here. Real Estate Sector is one of its kind has its own VAT nuances, and GAZT has already issued VAT Guidelines on the sector.

These are difficult times for the entire Mankind, and as the saying goes ‘This Time Shall Also Pass’

Stay Safe...!

Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.

Other articles by Ganesh Nair


like  3 Likes
views 541


More From Articles




close x