Deemed Supplies in Saudi Arabia: The Hidden VAT Trigger

A deemed supply — referred to in the regulations as a Nominal Supply — is a VAT event that arises without a sale. No customer, no invoice, no consideration. Yet VAT is owed. This is the provision that catches the most businesses off guard.

Article 15 of the VAT Implementing Regulations establishes that certain transactions are treated as if a taxable supply had taken place, even though no consideration changes hands. The rationale is straightforward: a business that claims input VAT on a purchase and then applies those goods or services to a non-business purpose has effectively consumed them free of VAT — which is inconsistent with the fundamental principle that VAT falls on final consumption.

The April 2025 amendments to Article 15 restated the scope of deemed supply more broadly: a taxable person is deemed to have made a supply in all cases provided for under the GCC Agreement, the VAT Law, and the Implementing Regulations. The practical situations remain consistent with prior law, but the drafting now clearly signals ZATCA’s intent that the provision is interpreted expansively.

A business that gives goods away — whether as gifts to clients, promotional samples, or items provided to employees — is making a deemed supply. VAT is due on the fair market value of those goods.

Two de minimis thresholds apply before the deemed supply rule fires:

Per-recipient limit: Gifts or samples with a fair market value of no more than SAR 200 per recipient per calendar year are not treated as deemed supplies. Goods provided to employees at up to the same SAR 200 per person per year threshold are also excluded.

Annual aggregate limit: Across all recipients, the total fair market value of gifts, samples, and goods supplied without consideration must not exceed SAR 50,000 per calendar year. Once either limit is crossed — per recipient or in aggregate — a deemed supply arises on the excess.

For services provided without consideration — such as complimentary consulting hours or free event entry — the same thresholds apply: SAR 200 per person per year and SAR 50,000 annual aggregate. Services provided to employees or to promote the business within these limits are not deemed supplies.

When a registered business uses goods or services — on which it claimed input VAT — for a personal or non-business purpose, a deemed supply arises. The business is treated as having supplied those goods or services to itself at fair market value.

Common examples include: a director using a company car for personal travel; a business owner taking stock items for personal use; a professional firm using business premises for private events. In each case, input VAT was recovered on acquisition, but the use is no longer within the scope of the business’s economic activity. The deemed supply rule rebalances that recovery.

This provision is deliberately broad. It applies whenever the use of goods or services shifts from a taxable purpose to a personal or non-business purpose — including partial shifts, where only a proportion of use becomes personal.

A deemed supply also arises when goods or services originally acquired for taxable activity are repurposed for exempt activity. This is distinct from personal use — the goods remain within the business, but their use has shifted to a category that does not support input VAT recovery.

A classic example: a commercial property developer claims input VAT on construction costs, then decides to convert and lease the completed building as residential accommodation (which is exempt). The change of use triggers a deemed supply — the developer must account for VAT on the value of the goods now applied to exempt use.

For capital assets, this interacts with the Capital Goods Scheme (covered in P1-I), which governs adjustments over a 10-year period for real estate and 5 years for other assets. The deemed supply rule applies immediately on the change of use; the capital goods adjustment applies annually over the adjustment period.

When a taxable person ceases its economic activity — and deregisters from VAT — a deemed supply arises on any goods retained at the date of deregistration. The business is treated as having made a supply of all remaining stock, assets, and goods on hand, at their fair market value on that date.

Under the April 2025 amendments to Article 15(7), the rule was extended to also capture situations where a person is deemed ineligible for VAT registration — not just formal deregistration. This means the exit VAT charge can now arise when a business no longer meets the conditions for registration, even if deregistration has not yet been formally processed.

The practical implication is significant: a business that winds down operations, runs off its remaining inventory over several months, and then deregisters may find that goods still on hand at deregistration date carry a VAT liability — even though the business believed its activities had effectively concluded.

The value of a deemed supply is its purchase cost or production cost to the business. Where cost cannot be ascertained — or in the case of capital assets that have been used in the economic activity — the value is the fair market value on the date of the deemed supply.

For business cessation specifically, the value is the fair market value of retained goods at the deregistration date.

Where a business has only partially recovered input VAT on the costs directly linked to a deemed supply — for example, because it applied a proportional deduction — the value of the deemed supply is adjusted proportionally to reflect only the VAT actually recovered. This prevents double taxation where input VAT was only partially claimed.

A supply is not treated as a deemed supply where a business provides goods or services without consideration if it never deducted — or recovered — the input VAT on the related direct costs, and can produce documentary evidence to confirm this.

Under the April 2025 amendment to Article 15(9), this escape route now explicitly requires that the business maintains documents confirming it did not deduct or recover the input VAT. The documentation requirement is new and material: without it, the escape cannot be relied upon, even if input VAT was genuinely not recovered.

The practical message is clear: businesses that incur VAT-bearing costs on items they intend to distribute freely — and do not recover that input VAT — must document that decision at the time. A retroactive claim that input VAT was not deducted, without contemporaneous records, will not be accepted.

• Undeclared corporate gifts. Ramadan gifts, promotional items, and client entertainment goods above the SAR 200/SAR 50,000 thresholds generate output VAT obligations that many businesses simply do not account for.
• Untracked personal use. Directors and owners using business assets personally without accounting for deemed supply VAT is a recurring audit issue — particularly for motor vehicles and business premises.
• No documentation for the no-recovery escape. After April 2025, failure to maintain contemporaneous records proving input VAT was not deducted means the escape from deemed supply is unavailable, regardless of the actual facts.
• Surprise exit VAT on deregistration. Businesses that have not planned for the deemed supply charge on retained goods at deregistration can face an unexpected liability at precisely the moment they are winding down.