Real Estate Transaction Tax in Saudi Arabia
2021/03/14
What is real estate transaction tax?
In the Kingdom of Saudi Arabia, all the sales and disposal of real estate were subject to value added tax at the basic rate of 15%. Real estate transactions have been exempted from value added tax as of October 4, 2020, and instead, real estate disposal tax at a rate of 5% has been added to any real estate transaction. It involves any legal action that transfers the ownership of the property or its possession for the purpose of owning or gaining its benefit; that includes the sale, will, financial lease, lease ending with ownership, transfer of shares in real estate companies, usufruct contracts with a period of more than 50 years which are not deductible nor refundable. This decision exempts certain transactions from real estate transaction tax; these exceptions can be applied to some transactions to avoid tax liabilities and additional costs on various economic activities, so how can you benefit from these exceptions?
Real estate tax exemptions
All sales or assignment of usufruct rights are subject to real estate transactions tax, with the following:
- Distribution of inheritances.
- Disposing to the progeny / family endowment, charitable endowment, or charity association, provided that this does not include the management of such transactions.
- Disposing of the real estate to a government agency or public figure to benefit the public.
- Disposing of real estate by a government agency that is not related to investment, commercial or economic purpose.
- Disposing of real estate in cases of expropriation for public benefit.
- Any endowment made up to second degree relatives.
- Providing the real estate as an in-kind share in the capital of joint-stock companies, limited liability companies, and solidarity, with the condition that ownership cannot be transferred for five years.
- Real estate transactions that were subject to VAT before the authentication process, provided that there are no changes to the parties of the transaction nor to the terms of the contract that is subject to VAT.
- Disposing of real estate prior to the effective date of this regulation for the purpose of ownership and lease contracts.
- Disposing of real estate temporary for the reason of transferring it between a fund and a custodian or vice versa in accordance with the Capital Market Authority’s regulations.
- Disposing of the real estate to a foreign government, an international organization, authority, diplomatic or military member, or consular that are accredited in the Kingdom, on condition of reciprocity.
- Disposing of the real estate as in-kind share in the capital of a real estate investment fund when the fund is initially established in accordance with the Capital Market Authority’s regulations, except for the funds that are established to lease real estate.
Special cases of real estate disposal tax application:
Within the aforementioned cases, exceptions apply to the transfer of real estate ownership in the case of the initiation of real estate funds and the transfer of ownership from the founders to the real estate funds, which leads to the exemptions of real estate tax, which is a non-refundable tax and it will be added as an additional liability. Moreover, another exception is in the case of joint-stock companies, limited liability companies, solidarity, where real estate represents an in-kind capital in the company in addition to real estate transactions with government corporations and other cases referred to, which enables many people and companies to be exempt from real estate transactions tax, which leads to save costs on any additional tax expenses.
As tax consultants in the Kingdom of Saudi Arabia, we have sufficient knowledge and experience to determine whether contracts, transactions, sale and assignment of usufruct rights are subject to real estate transactions tax. With our expertise, we in a position to determine who is subject to it or who is exempt from it. We have also worked with major investors and companies that own real estates and wish to establish real estate investment funds or various real estate projects, which provides us with sufficient knowledge and experience to serve and provide adequate professional advices to the real estate sector within the Kingdom of Saudi Arabia.
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Shadi NassarManager - Tax & Zakat