Category: VAT

Capital assets are not consumed in a single period — they are used over years. Saudi VAT law recognises this and requires businesses to monitor how those assets are used throughout a defined adjustment period, making corrections if the use changes.

Article 52 of the VAT Implementing Regulations establishes the capital assets adjustment scheme. It is one of the most technically complex areas of Saudi VAT — but also one of the most commonly misunderstood. Businesses that buy machinery, fit out office space, or invest in significant equipment need to understand that the Input Tax position on those assets is not fixed at the point of purchase. It can change — and must be reported annually — for up to six years for most assets, and ten years for real estate.

Ordinary business costs — professional fees, utilities, consumables — are incurred and consumed within the same period or shortly after. The VAT position is settled when the invoice is processed. Capital assets are different: a machine purchased in 2024 might still be in active use in 2030 or beyond, serving whatever activity the business undertakes over that entire period.

If the business’s VAT position changes during the life of the asset — for example, it moves from fully taxable to partially exempt activities — the original Input Tax deduction may no longer reflect reality. The capital assets adjustment scheme corrects for this on an ongoing basis, ensuring that the Input Tax recovery across the life of the asset matches actual use, not just intended use at the point of purchase.

The adjustment period runs from the date of purchase of the capital asset. If the accounting life of the asset — as determined by the business’s depreciation policy — is shorter than the applicable adjustment period, the accounting life is used instead, with any partial year counting as a full year.

At the time of acquisition, Input Tax is initially deducted based on the intended use of the asset. This initial deduction sets the baseline. At the end of each 12-month period within the adjustment window, the business must compare its actual use of the asset against that original intended use and calculate whether an adjustment is required.

The annual adjustment is calculated using a fraction:

If there is no change in use from the initial intended use in a given year, no adjustment is required for that year. The obligation to adjust arises only when actual use differs from intended use.

Sale or Disposal

When a capital asset within its adjustment period is sold or permanently disposed of, the entire remaining adjustment period is settled in the VAT return for the period of disposal. The remaining Input Tax position (all future annual slices) is adjusted in that single return rather than spread across future years. This creates a one-off Input Tax adjustment at the point of sale.

No adjustment is needed if the asset is destroyed, stolen, or reaches the end of its useful life before the end of the adjustment period.

Asset No Longer Used for Taxable Activities

Where a capital asset is no longer used for taxable activities — but the business retains the asset rather than selling it — the treatment is different. No Input Tax adjustment is made for the remaining adjustment period. Instead, the business is treated as making a deemed supply of the asset, calculated using the formula involving remaining useful life and the initial recovery percentage. The result is output VAT becoming due on that deemed supply.

When a business incurs capital expenditure on an asset it already owns — for construction, enhancement, or improvement — that expenditure is treated as additional acquisition cost. A fresh adjustment period commences from the date of completion of the works.

This means a business that refurbishes a building in its 8th year of ownership triggers a new 10-year adjustment period on the refurbishment expenditure — separate from and running concurrently with whatever remains of the original building’s adjustment period. Both must be tracked independently.

• Failing to track capital assets within their adjustment period. The annual review obligation exists for every capital asset within its adjustment window. Businesses with large asset bases need a systematic tracking process — not ad hoc reviews.
• Missing the year-end adjustment in the final return. The adjustment is made in the final VAT return of the 12-month period. Filing it in the wrong period is a technical error that ZATCA can identify on audit.
• Not opening a new adjustment period after CAPEX. Enhancement or improvement expenditure on existing assets resets the clock on that CAPEX. Treating it as having no ongoing adjustment obligation is incorrect.
• Disposing of assets within the adjustment period without settling the remaining Input Tax. The disposal adjustment must be calculated and reported in the period of sale — it does not carry forward.

For businesses that make both taxable and exempt supplies, Input VAT recovery is not a simple yes or no — it depends on how costs are used. Getting the apportionment calculation right is one of the most technically demanding aspects of Saudi VAT compliance.

Article 51 of the VAT Implementing Regulations sets out the proportional deduction framework for mixed businesses. The principles are drawn from Article 46 of the GCC VAT Agreement. Businesses in financial services, real estate, healthcare, and insurance — where exempt revenues are common — face this calculation every period. But even businesses outside those sectors encounter apportionment on shared overhead costs.

Apportionment applies to any taxable person that makes both taxable and exempt supplies. Under Saudi VAT, the main categories of exempt supply include financial services (loans, deposits, insurance products), residential real estate rental, and certain healthcare and education supplies. If any of these appear in your revenue alongside standard-rated or zero-rated supplies, you are a mixed business and apportionment applies to your shared costs.

The key trigger is not the percentage of exempt revenue — even a business where exempt supplies represent 5% of turnover must apportion the Input Tax on costs that cannot be directly attributed to either the taxable or exempt activity.

Before applying the apportionment formula, businesses must first attempt to directly attribute each cost to either taxable or exempt use. The three-tier framework works as follows:

The apportionment calculation applies only to residual costs — the overhead that genuinely serves both parts of the business. Finance team salaries, office rent, IT infrastructure, and professional advisory fees are typical examples. Direct attribution should be applied wherever it is genuinely supportable; the apportionment formula is not a shortcut to be applied universally.

For residual Input Tax, Article 51(4) prescribes the default recovery percentage as a simple fraction:

What Is Included and Excluded from the Fraction

The exclusion of capital asset disposals is important. If a business sells a building or major piece of equipment, that transaction could dramatically distort the recovery fraction in the year of disposal. Excluding it from both the numerator and denominator preserves the accuracy of the ongoing apportionment calculation.

Businesses using the default method apply a provisional recovery percentage throughout the year based on the prior year’s supply values. At the end of the calendar year, they must perform a true-up: comparing the provisional fraction used during the year against the actual supply values for the year just completed, and making an adjustment in the final VAT return for that year.

If the actual taxable percentage was higher than the provisional figure — meaning more Input Tax was recoverable in reality — an additional deduction is made. If the actual percentage was lower, a repayment is made. This adjustment ensures the full-year recovery reflects actual economic activity rather than last year’s proxy.

The default revenue-based fraction is a reasonable proxy for most businesses. But for some — particularly those with high-value exempt transactions that do not reflect the actual use of shared costs — it may produce a recovery percentage that overstates or understates the genuine Input Tax attribution.

Article 51(8) allows a taxable person to apply to ZATCA to use an alternative proportional deduction method where that alternative more accurately reflects actual use. ZATCA can approve or reject the application and will specify a period during which the approved method must be used — up to a maximum of five years. A new application is required once that period expires.

Importantly, ZATCA retains the power to direct a change of method at any time if it determines that neither the default nor the approved alternative accurately reflects actual use. This override right means that even businesses with approved alternative methods must continue monitoring whether their method remains fit for purpose.

• Failing to perform the annual true-up. The year-end adjustment is mandatory, not optional. Businesses that apply a provisional fraction throughout the year without reconciling at year-end are non-compliant — even if the under/over-deduction is small.
• Including capital asset disposals in the fraction. Selling a property or major asset in the year and including that in the denominator distorts the recovery percentage downward. Capital asset disposals must be excluded.
• Applying the formula to directly attributable costs. The formula applies only to residual Input Tax. Applying it universally to all Input Tax — including costs that can be directly attributed — either understates or overstates recovery depending on the business’s mix.
• Using the wrong prior year. The fraction is based on the prior calendar year’s supply values, not the current period. Using current-year data instead is a common error that produces a different result.

Not every business cost qualifies for Input VAT recovery. Article 50 of the VAT Implementing Regulations identifies categories of expenditure where the Input Tax is permanently blocked — and the April 2025 amendments expanded that list significantly.

These are not partial restrictions or apportionment situations. Blocked Input Tax is irrecoverable, full stop. No matter how genuine the business purpose, no matter how well-documented the invoice — if the expenditure falls within a blocked category, the Input Tax cannot be deducted. The law treats these purchases as if they were made outside of economic activity entirely.

Understanding exactly what is blocked — and what the exceptions are — is one of the highest-value compliance exercises a VAT-registered business in Saudi Arabia can undertake.

The philosophical basis for blocking Input Tax on certain categories is that the expenditure either has an inherently personal or non-business character, or creates a significant risk of private benefit to individuals — employees, directors, or their families. The VAT system is designed to tax final consumption; allowing full Input Tax recovery on entertainment or personal vehicles would effectively subsidise consumption through the VAT system.

The GCC VAT Agreement authorises each member state to determine categories of Input Tax that cannot be deducted where the expenditure is for purposes other than economic activities. Saudi Arabia has implemented this through Article 50, with the April 2025 amendments updating the list to address areas that had been generating compliance uncertainty.

The April 2025 amendments fundamentally redefined what constitutes a Restricted Motor Vehicle — and the new definition is more practical and objective than what preceded it.

New definition: A Restricted Motor Vehicle is any vehicle designed to transport 10 persons or fewer. This replaces the previous definition which turned on whether the vehicle was available for private use — a test that was harder to apply in practice and generated frequent disputes.

What Is Now Explicitly Excluded from the Definition

The following vehicle types are not Restricted Motor Vehicles and therefore do not trigger the input tax block:

• Trucks, cranes, and similar heavy equipment used exclusively for economic activity and not available for private use
• Vehicles purchased or rented for resupply — i.e. dealers, rental companies, or fleet operators selling/leasing vehicles as their taxable activity
• Vehicles registered as emergency vehicles — ambulances, fire trucks, security and guard vehicles
• Vehicles used exclusively for economic activity purposes with no availability for private use

This is the most impactful change in the April 2025 amendments for most large employers. Healthcare services and insurance provided to employees and their dependants are now explicitly blocked — meaning Input Tax on group health insurance premiums, medical centre fees, and employee healthcare costs cannot be recovered.

The exception is narrow: if the employer is legally obligated to provide the benefit under applicable KSA law, the block does not apply. This means businesses need to assess their healthcare and insurance obligations under Saudi labour and insurance regulations carefully. Where there is a legal mandate, the Input Tax remains recoverable. Where benefits are provided voluntarily or above the legally required standard, the Input Tax on the excess is blocked.

Across all blocked categories, there is a consistent and important exception: if the blocked expenditure is purchased for the purpose of direct resupply as a taxable supply, the input tax block does not apply.

This makes sense. A hotel that purchases food and beverage items for its restaurant is purchasing a blocked category — but it then resupplies that catering as a taxable service to its guests. The hotel is in the business of providing hospitality; it is not consuming the catering for its own internal purposes. Similarly, an entertainment company purchasing event tickets for resale to corporate clients is making a taxable supply of those tickets — the Input Tax is recoverable.

The exception is narrow: it requires a direct resupply. Buying client entertainment as a cost of maintaining relationships — rather than as something you sell — does not qualify.

• Recovering Input Tax on group health insurance post-April 2025. The most pressing issue for most large Saudi employers. Unless legally mandated, this is now blocked.
• Incorrectly classifying vehicle use. The 10-person capacity test is objective, but businesses may still attempt to argue that certain vehicles are excluded under the “exclusively for business” exception — without adequate evidence of exclusive use.
• Claiming entertainment costs as “business development.” Labelling entertainment as client meetings or business development does not remove it from the blocked category. The nature of the expenditure controls, not the internal description.
• Applying the resupply exception too broadly. The exception requires direct, taxable resupply. Incidental benefit to customers — for example, complimentary refreshments at a meeting — does not constitute a taxable resupply.

For goods and capital assets purchased before registration, Saudi VAT law takes a more generous approach than for services — but the book value test introduces a calculation step that catches many businesses by surprise.

While services recovery is capped at a six-month lookback, there is no equivalent time restriction for goods. A business that purchased equipment, inventory, or capital assets years before registering for VAT may still be able to recover Input Tax on those items — subject to meeting four specific conditions and, for capital assets, applying the book value test to determine the recoverable amount.

The pre-registration Input Tax rules in Article 49 of the VAT Implementing Regulations draw a clear distinction between services and goods — and the treatment is meaningfully different:

The absence of a time limit for goods is intentional. Businesses often hold inventory, equipment, and capital assets for extended periods. Restricting recovery to a fixed lookback window would create an arbitrary and economically unjustifiable cut-off for legitimate business assets.

Article 49(3) of the Implementing Regulations sets out four conditions that must be satisfied for Input Tax on pre-registration goods to be recoverable:

This is where the calculation becomes non-trivial. Under Article 49(4) of the Implementing Regulations, the maximum deductible Input Tax on pre-registration capital assets is calculated as if the net book value of the asset at the date of registration were the consideration for the supply — not the original purchase price.

In simple terms: the older the asset and the more it has been depreciated, the less Input Tax can be recovered. This makes commercial sense — if a business has already written down an asset to near zero, the VAT benefit of owning it has already been partially absorbed into the cost base over the years of ownership.

For non-capital goods (inventory, stock, consumables), the recoverable Input Tax is based on the original purchase invoice amount — provided the goods are still on hand at the registration date and have not been used or sold. The stock on hand at the registration date needs to be identified and matched to purchase invoices.

For capital assets, the process requires a fixed asset register review at the registration date to identify:

• Assets purchased from VAT-registered suppliers, with original invoices available
• The net book value of each qualifying asset at the registration date
• Assets that are still in use for taxable business purposes (not disposed of or written off to zero)
• Assets that are not in the blocked categories

The total recoverable amount is then included as Input Tax in the first VAT return after registration. The original tax invoices must be retained as supporting documentation.

• Claiming Input Tax at the original purchase price rather than book value. This is the most common error — and it results in an over-deduction that ZATCA can assess. The book value test is mandatory for capital assets.
• Missing original invoices. Without the original supplier tax invoice, the deduction cannot be supported. Businesses with older assets may find that original documentation is missing, particularly where systems have changed.
• Claiming for assets already disposed of. Input Tax on assets no longer held at the registration date — sold, scrapped, or written off — cannot be recovered under the pre-registration rules.
• Applying the goods rule to services. The no-time-limit approach applies to goods only. Service invoices are subject to the six-month window regardless of how long the relationship with the supplier has existed.

Businesses incur real costs before they register for VAT. Saudi law allows some of that pre-registration Input Tax to be recovered — but the window for services is narrow and the conditions are strict.

Most businesses approaching the VAT registration threshold have already been spending for months: professional fees, advisory costs, software licences, marketing campaigns. Each of those invoices carries 15% VAT. The question is whether that VAT — paid before the business was registered — can be recovered once registration is in place. Under Article 49(2) of the VAT Implementing Regulations, the answer is yes, subject to strict conditions and a defined lookback window of six months.

For a business registering after a rapid growth period, the pre-registration Input Tax can be material. Consider a technology company that spent SAR 2 million on software development, consulting, and marketing in the six months before its registration date. At 15% VAT, that is SAR 300,000 in Input Tax that is potentially recoverable in the first VAT return after registration. Leaving that unclaimed is a significant and unnecessary cost.

Equally, businesses that miss the lookback window — by not identifying pre-registration invoices promptly — forfeit the recovery right permanently for those invoices. This makes understanding the rules and acting quickly after registration commercially important, not just technically interesting.

Article 49(2) of the VAT Implementing Regulations provides that a taxable person is entitled to deduct Input Tax incurred on services supplied during the six months immediately before the effective date of registration.

The reference point is the effective date of registration — the date from which ZATCA treats the business as registered, which may differ from the date the application was submitted. If registration is backdated by ZATCA to an earlier date, the six-month window is calculated from that backdated date.

Being within the six-month window is necessary but not sufficient. Three additional conditions must be met for each service invoice claimed under Article 49(2):

Understanding “Not Fully Used”

This condition catches situations where the service has already been entirely consumed before the registration date. If a business paid for a marketing campaign that ran and concluded entirely before it registered, the associated Input Tax cannot be recovered — because the service was fully used prior to registration. Where a service spans the registration date — for example, a software licence running from March to September and registration in July — only the post-registration portion may qualify, though the regulations do not specify a precise apportionment methodology for such cases and professional judgement is required.

Pre-registration Input Tax on services is claimed in the first VAT return filed after registration. There is no separate application process — it is simply included as Input Tax in the relevant return, with the invoices retained as supporting documentation.

The five-year time limit on Input Tax claims (covered in a separate article in this series) applies in the normal way. But in practice, pre-registration claims should be made in the first return after registration. Delaying creates no benefit and increases the administrative burden of locating and validating older invoices.

• Identify all service invoices received in the six months before the registration date
• Confirm each invoice was for taxable business purposes and falls outside the blocked categories
• Confirm the service was not fully consumed or resupplied before the registration date
• Ensure each invoice meets the tax invoice format requirements — VAT number, correct amounts, supplier and buyer details
• Include the total recoverable amount as Input Tax in the first VAT return

• Missing the window entirely. Businesses that do not proactively review pre-registration invoices in the first return period often lose the recovery right permanently for those invoices.
• Claiming services fully consumed before registration. This is the most common error — assuming that anything within six months qualifies, regardless of whether the service was still live at the registration date.
• Applying the six-month rule to goods. The six-month window applies only to services. Goods have a different and more flexible pre-registration recovery rule (covered in the next article in this series).
• Poor documentation. Pre-registration invoices are often harder to locate, particularly where finance systems were less formalised before registration. The same invoice validity requirements apply — without a compliant tax invoice, the claim fails.

The amendments were published under ZATCA Board Resolution No. 01-06-24, dated 17/05/1446H, in Official Gazette Issue 5082 on 18 April 2025. They are effective from the date of publication — with one notable exception: the new Article 47(3) provisions on resident supplier marketplaces take effect from 1 January 2026.

The amendment to Article 47 — whose title was updated from “Persons Liable to Pay Tax” to “Persons Liable to Pay Tax in Special Cases” — significantly expands the scope of who bears VAT liability when services are supplied through digital intermediary platforms.

The Deemed Supplier Principle: Non-Resident Suppliers

Under the revised Article 47(2), where services are facilitated electronically through an online marketplace acting as an intermediary for non-resident suppliers, the marketplace is deemed to have purchased those services for its own account and re-supplied them in its own name. The marketplace bears responsibility for collecting and paying the VAT.

The new definition of an “online marketplace” is broad. Under Article 47(4):

For financial sector businesses, this definition is wide enough to capture digital platforms facilitating financial products, lending services, or investment products provided by third-party non-resident institutions.

What This Means for Fintech and Digital Finance Platforms

A Saudi fintech platform that connects customers with non-resident lending or investment providers — facilitating the supply of those services electronically — could fall within the deemed supplier rule. If it does, the platform bears the VAT collection and remittance obligation rather than the non-resident provider.

• Lending marketplaces facilitating non-resident bank or credit provider offerings must assess whether they trigger the deemed supplier rule — and whether they qualify for the narrow exception.
• Robo-advisers and digital wealth platforms connected to non-resident fund managers or investment providers need to consider whether they fall within the definition.
• Insurance aggregators facilitating products from non-resident insurers may need to re-examine their VAT liability position under the new framework.

The Exception — And Why It Is Narrow

A marketplace is only relieved of deemed-supplier status if all of the following apply simultaneously:

• The non-resident supplier is explicitly identified as the supplier in all contractual arrangements, and in the invoice and receipt issued to the customer
• A direct and independent contractual relationship exists between the non-resident supplier and the customer
• The marketplace does not set terms and conditions, determine consideration, charge customers, collect consideration, handle complaints, or provide offers or compensation in connection with the supply

Most active digital intermediaries — those genuinely facilitating transactions rather than passively referring customers — will not meet all three conditions simultaneously. The exception is designed for true pass-through referral arrangements with no active facilitation role.

The amended Article 47(3) — effective from 1 January 2026 — extends the deemed supplier logic further. Where goods or services are supplied in the Kingdom through an online marketplace acting as an intermediary for resident suppliers who are not registered for VAT, the marketplace is deemed to have purchased and re-supplied those goods or services and is responsible for the VAT.

This is directly relevant to financial sector platforms that facilitate services from smaller, non-registered resident operators — including smaller lending intermediaries, financial service providers, or advisory businesses below the VAT registration threshold.

The amendment to Article 50(1) made a targeted but meaningful linguistic change to the conditions under which input VAT is not deductible. The prior version referred to expenditure incurred “in the course of carrying on” an economic activity. The revised wording now refers to expenditure incurred “for the purpose of carrying on” the economic activity.

This shift from circumstantial connection (“in the course of”) to intentional attribution (“for the purpose of”) focuses the analysis on why the cost was incurred — not merely whether it happened while the business was operating.

For financial institutions managing large shared overhead across exempt and taxable activities, this reinforces the importance of documenting the purpose of expenditure at the point it is incurred — not retrospectively. Costs that cannot be clearly linked to a business purpose may face greater scrutiny under the refined language.

The amendments to Articles 40(10) and 40(11) modified the timing and scope of the twelve-month payment rule — and introduced a significant operational carve-out for financial institutions.

The Original Rule

Under the pre-amendment rule, if a taxable person deducted input VAT on a supply received but failed to make full payment within twelve months of the supply date, they were required to reduce their input VAT deduction by the amount of tax on the unpaid consideration.

What Changed

The Financing Contract Carve-Out — Detail

The amended Article 40(10) introduces an express carve-out for supplies of goods under financing contracts — including finance leases, murabaha arrangements, and lease-to-own contracts — from a legally licensed provider, where payment is made in periodic instalments.

The adjustment obligation does not apply to these arrangements provided that:

• The contract or agreement remains valid and in force
• There is no legal dispute over the agreement or the supply
• The supplier has declared the full amount of output tax due on the supply in their tax return for the relevant period
• The customer holds a written certificate from the supplier confirming that the full output tax has been declared

The April 2025 resolution granted a grace period of up to 180 days from the date of publication for representative members of tax groups registered with ZATCA before the amendment to regularise their tax group structures in accordance with the updated provisions of Article 10.

Financial conglomerates, banking groups, and insurance holding structures with existing VAT group registrations should:

• Review their current tax group structure against the updated Article 10 requirements
• Identify any members or entities whose inclusion needs to be regularised
• Submit any necessary amendments to ZATCA within the 180-day window
• Not assume that a pre-existing group registration automatically complies with the updated framework

The 180-day window expires approximately in mid-October 2025. Groups that have not yet assessed their compliance position should treat this as an immediate action item.

Both zero-rated and exempt supplies result in no VAT being charged to the customer. That is where the similarity ends — and where most classification errors begin.

The difference lies entirely in what happens to input VAT on the costs that produce those supplies. A business making zero-rated supplies can recover all input VAT it paid on related purchases — it is a full participant in the VAT system, just at a 0% output rate. A business making exempt supplies cannot recover any input VAT on costs directly attributable to those supplies. That unrecovered VAT becomes a permanent cost embedded in the P&L.

One important rule resolves conflicts: where a supply qualifies as both exempt and zero-rated under the Regulations, it is treated as zero-rated. Zero-rating always prevails over exemption.

The following supplies are zero-rated under Chapter 6 of the VAT Implementing Regulations. All carry full input VAT recovery rights.

Exports of Goods (Article 32)

Goods exported from the Kingdom to a destination outside GCC territory are zero-rated. The critical requirement: the supplier must retain evidence that goods departed GCC territory within 90 days of the supply date. This evidence must include customs export documentation and a commercial transport document. After 90 days, zero-rating cannot be applied retroactively — the supply becomes standard-rated. This deadline is absolute.

Services to Non-GCC Residents (Article 33)

Services supplied to a customer who has no residence or establishment within any GCC member state are zero-rated, provided the benefit of the service is received outside the GCC. This is the primary zero-rating route for professional services, consulting, and digital services exported to non-GCC clients. The supplier must retain documentary evidence of the customer’s non-GCC status. Under the April 2025 amendments, tourist tax refund services are also specifically zero-rated under this Article.

International Transport (Article 34)

The international transport of goods and passengers is zero-rated, along with directly incidental services including luggage handling, seat reservations, and sleeping berths on qualifying international journeys. Qualified means of transport — aircraft and vessels meeting international route criteria — and their maintenance, repair, and modification services also qualify, subject to the supplier obtaining a certificate from the customer confirming the qualifying use. A mixed-use transport operator (domestic and international routes) must apply a four-factor average test to determine what proportion of its activity qualifies.

Qualifying Medicines and Medical Equipment (Article 35)

Medicines and medical goods classified as qualifying by the Ministry of Health or other competent authority are zero-rated. The classification is dynamic — it is updated by the relevant authority from time to time. Businesses in this sector must monitor the approved classification lists to confirm continued zero-rating eligibility.

Investment Metals (Article 36)

The first supply of gold, silver, or platinum by its producer or refiner is zero-rated. Subsequent supplies for investment purposes are also zero-rated where the metal meets a purity threshold of at least 99% and is tradeable on the global bullion market. Jewellery and processed metal products do not qualify — this is an investment-grade metal provision, not a general precious metals exemption.

Qualified Military Goods (Article 36 Bis)

Locally manufactured military goods supplied to Saudi armed forces and government security forces are zero-rated, provided the supplier is registered with ZATCA, licensed by the General Authority for Military Industries, and holds a valid supply certificate for each contract. Under the April 2025 amendments, the certificate requirements were simplified — the separate contract-by-contract data requirement was removed in favour of a single supplier-level certificate confirming compliance.

Supplies to Diplomatic Missions (Article 36 Bis 2)

Supplies from qualified suppliers to diplomatic missions are zero-rated. The conditions and qualification criteria for suppliers are set by a decision of the ZATCA Governor.

Customs Duty Suspension Situations (Article 32 Bis — New April 2025)

A new Article 32 Bis, introduced by the April 2025 amendments, provides that supplies of goods into a customs duty suspension situation, and supplies of goods within such situations, are zero-rated in accordance with the Unified Customs Law. The previous clause 7 of Article 32 (which zero-rated goods subject to a customs duty suspension regime) was deleted and replaced by this broader, standalone provision.

The following supplies are exempt under Chapter 5. No input VAT may be recovered on costs directly attributable to these supplies.

Financial Services (Article 29)

The supply of financial services where the consideration is implicit — meaning it is derived from a margin, spread, or profit-share rather than an explicit fee — is exempt. This covers interest-bearing loans, profit from Islamic financing arrangements, foreign exchange dealings where profit is earned on the margin, and the issue or transfer of debt securities. By contrast, financial services charged as explicit fees — advisory fees, arrangement fees, account management fees — are generally standard-rated. The boundary between fee-based and margin-based financial services is one of the most technically complex areas of Saudi VAT.

Residential Real Estate (Article 30)

The sale and lease of residential real estate is exempt. Residential real estate includes private homes, apartments, and student or school accommodation. The exemption covers the legally assigned boundaries of the property — gardens, garages, and permanent fixtures are included.

The following are explicitly excluded from the residential exemption and remain standard-rated: hotels, inns, guest houses, motels, serviced apartments, and any building designed to offer temporary accommodation to visitors or travellers. Short-term holiday rentals fall outside the exemption. The classification of a property as residential or temporary accommodation is a factual question that depends on the nature and terms of the arrangement.

Businesses that make both taxable (including zero-rated) and exempt supplies cannot recover all of their input VAT. They must apply a proportional deduction — recovering only the fraction of input VAT that corresponds to their taxable activity.

The default method calculates this fraction as: taxable supplies ÷ total supplies (taxable + exempt). This ratio is applied at the start of each tax period using estimated figures, then trued up at the end of the calendar year against actual supply values. Any adjustment required is reflected in the final VAT return for that year.

A business may apply to ZATCA to use an alternative method if it more accurately reflects the actual use of inputs. ZATCA can approve or reject such applications, and approved methods are valid for a maximum of five years before a new application is required.

• Treating exempt as zero-rated. Recovering input VAT on exempt activity is a misclassification that ZATCA systematically identifies on audit. Retrospective assessments, penalties, and interest apply.
• Missing the 90-day export evidence deadline. Exporters who cannot produce customs documentation within 90 days lose the right to zero-rate permanently. This is not curable after the deadline.
• Classifying serviced apartments as residential. Any short-term or visitor accommodation arrangement is standard-rated. Applying the residential exemption to serviced apartments or Airbnb-style rentals is a category error that ZATCA can assess retrospectively.
• Failing the investment metal purity test. Precious metal businesses must confirm the 99% purity threshold is met for investment metal zero-rating. Jewellery and industrial metal supplies do not qualify.
• Not true-ing up the proportional deduction. Mixed businesses that apply an estimated ratio throughout the year but fail to reconcile it against actual year-end supply values are filing incorrectly.

Article 30(3) of the VAT Implementing Regulations is unambiguous:

The exclusion is categorical. There are no exceptions, no thresholds, and no circumstances under which a hotel or serviced accommodation property can access the residential real estate exemption. Every element of accommodation revenue from these properties is standard-rated at 15%.

This includes:

• Nightly room revenue at standard hotels and resorts
• Weekly or monthly rates at extended-stay properties
• Occupancy charges at serviced apartment buildings
• Accommodation fees at corporate housing managed as a hospitality product
• Revenue from apart-hotels, aparthotels, and branded residence concepts
• Revenue from short-term rental units operated through digital platforms

The most important principle in applying this exclusion: it turns on what the property is designed for, not on how long any individual occupant stays.

A purpose-built serviced apartment block does not become residential real estate because some occupants stay for six months. A hotel does not qualify for the residential exemption because a long-stay guest treats it as their address. The VAT classification is determined by the design and operational purpose of the building — assessed at the supply level, not the individual occupant level.

This design-based test has practical implications for any operator running a hybrid model, or converting residential buildings into hospitality use:

• Residential apartments converted for Airbnb-style lettings. Once the property is operated as short-term temporary accommodation for travellers, it has crossed into the excluded category — regardless of the fact that it was built and originally used as a residence.
• Furnished apartments marketed as “long-stay residences.” The marketing language does not determine the VAT treatment. If the business model is hospitality — flexible terms, hotel-style services, premium nightly or weekly pricing — the property is serviced accommodation.
• Corporate housing managed by a hospitality operator. A company that leases residential-grade units and manages them as a hospitality product — with reception, cleaning, flexible in and out, and managed turnover — is operating serviced accommodation, not making exempt residential leases.

The 15% VAT classification carries a meaningful commercial offset. Because hotel and accommodation supplies are fully taxable, operators can recover all input VAT incurred on their operating costs — in full, without restriction.

This is the direct inverse of the residential landlord’s position. A residential landlord making exempt leases cannot recover any input VAT on related costs. A hotel operator making fully taxable supplies recovers it all. The VAT cost embedded in construction and operations is fundamentally different between the two business models.

The most commercially challenging situations arise where the boundary between a residential lease and serviced accommodation is genuinely uncertain. There is no bright-line rule beyond the design test — and substance governs over form.

Where the classification of a supply is not obvious, ZATCA will assess the totality of the arrangement. Key indicators include:

Article 30 of the VAT Implementing Regulations exempts two distinct categories of real estate supply. They operate differently in scope — and confusing them is the root cause of most real estate VAT errors in practice.

The distinction matters in practice far more than many appreciate. A developer can sell a commercial building on an exempt basis. The same developer leasing that building generates 15% VAT on every rent payment. The asset is identical. The supply type determines the treatment.

Article 30(2) defines residential real estate as a permanent dwelling designed for human occupation. The definition explicitly includes:

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

The Two Elements That Both Matter

The definition hinges on two criteria that must both be present:

Both elements must be present simultaneously. A property that is permanent but not designed as a home does not qualify. A property designed as a home but providing only temporary occupancy does not qualify.

Article 30(4) extends the residential exemption to the full scope of the property as legally defined. The exemption covers:

• The main dwelling itself
• Gardens legally assigned to the property
• Garages that are a permanent part of the property
• Any other feature considered a permanent part of the property within its legal boundaries

This means a residential villa leased with an attached garage and walled garden is a single exempt supply. The landlord does not need to separate the garage or garden from the lease and assess them independently. The entire legally assigned property shares the residential classification — provided the principal use remains residential.

The exemption for residential real estate supplies has a significant and often underestimated cost implication: the input VAT incurred on construction, renovation, and related costs is not recoverable when the intended output supply is exempt.

A developer building residential apartments for sale or lease incurs 15% VAT on:

• Construction materials and contractor fees
• Architectural and engineering services
• Project management and consultancy
• Interior fit-out and fixtures

None of that input VAT is recoverable, because the resulting supplies — sales or leases of residential property — are exempt. This is a permanent embedded cost that must be factored into project economics from the outset.

Article 29(1) of the Implementing Regulations sets the analysis directly. Financial services are exempt except where the consideration is paid by way of an explicit fee, commission, or commercial discount.

Two structurally identical financial products — both serving the same economic function — can produce different VAT outcomes based purely on pricing mechanics. The substance of the underlying arrangement is the same. The compensation structure is different. That difference is everything.

Murabaha Financing

Diminishing Musharaka (Home Finance)

Finance Lease

Brokerage Services

Asset Management

Many financial products combine components that are exempt with components that are taxable. Bundling does not change the VAT character of either element. Each must be identified and accounted for separately.

The obligation to disaggregate and account for each component separately applies regardless of how the product is marketed or priced to the customer. The VAT return must reflect the economic reality, not the commercial presentation.

A frequent compliance risk arises when institutions attempt to restructure explicit fees into product pricing in order to achieve exempt treatment. The logic: if the charge is no longer separately visible, it is no longer an explicit fee.

This approach does not survive scrutiny. ZATCA assesses the economic character of the charge — not its label, its line position on an invoice, or the way it is absorbed into a product price.

• A fee that is separately negotiated during the product structuring process retains its explicit character even if it is later presented as part of the rate.
• A charge that is separately quantifiable — where the parties both know what it represents — is an explicit fee regardless of how it appears on the customer statement.
• Folding a management fee into a fund’s return structure after the fact does not convert it into margin income. The nature of the arrangement at the time it was agreed is what governs.