VAT Exempt Supplies/Items in Saudi Arabia

Tally Solutions | Updated on: August 23, 2023

Exempt goods and services are not subject to VAT. A seller of exempt supplies does not collect VAT on sales and is not allowed to recover the input VAT paid on his purchases/expenses. As a result, businesses that only sell exempt supplies are not allowed to register for VAT even if their taxable sales are above SAR 375,000.

List of exempt supplies in Saudi VAT

The Saudi VAT implementing regulations have notified the supplies which are exempted from VAT. Broadly, certain financial services and lease or license of the residential real estate are exempted from VAT.

Let us understand the Saudi VAT exempt supplies in detail.

Financial services

The supply of financial services will be exempt, except for instances where the consideration payable is by way of a discrete amount. The KSA VAT implementing regulations has not defined financial services but has specified the instances which are included in financial services. Financial Services include the following services:

• The issue, transfer or receipt of, or any dealing with, money, any security for money or any note or order for the payment of money
  
  
• The provision of any credit or credit guarantee
  
  
• The operation of any current, deposit or savings account
  
  
• Financial instruments, such as derivatives, options, swaps, credit default swaps and futures

If any of these financial services are conducted in return for an explicit fee, commission or commercial discount, as consideration in respect of the supply of services, it would amount to a taxable supply. Otherwise, it will be treated as exempt.

Apart from the above, the VAT implementation regulation has provided a non-exhaustive list of supplies which would be considered exempt financial services. The following are the exempted services.

• Interest or lending fees charged with an implicit margin for any form of lending, including loans and credit cards
  
  
• Interest or lending fees charged with an implicit margin for a mortgage or under a diminishing Musharaka arrangement
  
  
• Interest or lending fees charged with an implicit margin for finance, including finance leasing, hire purchase products or under a Murabaha contract
  
  
• Commissions charged on an implicit margin or spread for brokerage services, or under a Mudaraba or Wakala contract
  
  
• The issue or transfer of a debt security, equity security, or any other transferable document recognising an obligation to pay a monetary amount to the bearer
  
  
• The provision or transfer of a contract of life insurance, or the reinsurance of a life insurance contract

Lease or license of Residential real estate

The supply by way of lease, license or rental of any property defined as a residential real estate, designed or used for residential purposes is exempted from VAT. Here residential property means a permanent dwelling designed for human occupation including the following:

• Immovable property used or intended to be used as a home, such as houses, flats and apartments
  
  
• Other real Estate intended as a person’s primary residence, including residential accommodation for students or school pupils

The following are not considered as residential estate and VAT at 5% will be levied.

• hotels
• inns
• guest houses
• motels, serviced accommodation or
• any other building that is designed to offer temporary accommodation to visitors or travellers

Conclusion

Broadly, only the notified financial services and qualifying residential estate are exempt from VAT. The businesses dealing with above-mentioned supplies should be very clear that on making those supplies, VAT should not be charged and also they should not recover the input VAT paid on the purchase/expenses. For businesses in Saudi Arabia, dealing with the financial services, compliance burden may increase due to the apportionment of input VAT (on common input services or utilities) used for making taxable supplies and exempt supplies.

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