RETT on Islamic Finance Structures: Murabaha, Ijara and Finance Lease

Islamic finance accounts for the vast majority of residential and commercial property financing in Saudi Arabia. Murabaha, Ijara structures, and Finance Lease arrangements all involve at least two legal transfers of ownership as part of delivering what is, economically, a single financed transaction. Without a specific rule, two RETT liabilities would arise on what is fundamentally one purchase — creating a structural penalty on Islamic finance versus conventional financing.

The RETT Law and its Implementing Regulations (Article 2(l)) address this directly: a real estate transaction shall be subject to tax only once, provided the conditions for single-transaction treatment are met. This is not an exemption — it is a characterisation rule. One economic transaction, one RETT liability.

In a standard Murabaha or Finance Lease arrangement for real estate, there are two transfers:

1. First transaction: The financing entity (bank) purchases the property from the original seller (developer or individual owner). This is the taxable RETT event — RETT is assessed at 5% of the sale price, and the bank (as assignee/buyer at this stage, becoming the assignor on notarization to the financing entity) or the original seller pays RETT in the usual way.
2. Second transaction: The financing entity transfers ownership to the customer, typically upon completion of all installment payments. This second transfer is not a new taxable RETT event — provided the conditions below are met.

The three conditions for single-transaction treatment under Article 2(l):

• The first transaction from the original transferor to the licensed financing entity is subject to RETT in the normal way.
• Both transactions are included in the contracts issued by the financing entity, specifying the parties, the real estate, and the value for both legs.
• The description and value of the real estate stated in the financing contracts do not change between the two legs.

A critical point for calculating RETT on financed purchases: the implicit profit margin in licensed financing contracts is excluded from the RETT base. RETT is assessed on the underlying real estate value — the original purchase price — not on the total amount the customer pays including the bank’s profit markup.

An Islamic Ijara (lease) ending in ownership — where a financing entity acquires the property and leases it to the customer with an arrangement for the customer to ultimately acquire ownership — follows the same one-transaction principle. The financing entity’s initial acquisition is the taxable RETT event. The transfer of ownership to the customer at the end of the Ijara term is not a second RETT event, provided the contract conditions are unchanged.

A temporary transfer between an investment fund and its custodian (or between custodians of the same fund) in accordance with Capital Market Law arrangements is separately exempt from RETT under Article 3(10) of the Implementing Regulations. This covers the collateral-type transfers that occur in Islamic fund structures.

The Implementing Regulations (Article 3(14)) provide a separate exemption for temporary real estate transactions for the purpose of using the real estate as a guarantee (security) for financing or credit by a licensed entity — provided the real estate ownership is not permanently transferred to the financier or a third party.

This covers Islamic and conventional mortgage structures where title is temporarily passed to a lender as security. The key condition is “temporary” — the property must return to the original owner, not be permanently transferred away. If the lender exercises and permanently takes title (e.g. on default), that permanent transfer is a taxable event.