Capital Raising and Incidental Activities: Saudi Input VAT

A capital raise can support an ongoing taxable business even though the issue of securities has a different VAT treatment from the goods or services the business sells. Article 51(11) addresses specified events of this kind. It prevents the immediate event’s classification from being used as a complete answer to the input-tax question.

The provision is nevertheless conditional. Establish the event, its connection to qualifying activity, the costs received by the taxable person and the applicable recovery method. Calling a transaction strategic, infrequent or a restructuring does not establish that all its fees are recoverable.

The four statutory categories

Read the complete current Arabic Article 51(11), PDF pages 52-53. It covers:

The provision applies the proportion of the overall economic activity that constitutes taxable supplies, using the applicable Article 51 method. This may allow full recovery for a fully qualifying taxable business, or partial recovery for a mixed business. It does not displace restrictions, recipient/evidence requirements or the need to exclude non-economic use.

The Input Tax Deduction Guideline, third version, May 2026, section 14, page 59 treats qualifying costs as general overheads. Its English quotation omits the real-estate limb present in the current Arabic text. Use the complete provision rather than assuming the quotation lists every current category.

ZATCA’s example: new equity funds a taxable expansion

Example 33, section 14, page 60, concerns Al Barakah Co, an industrial-equipment supplier in Dammam. It issues new shares to existing shareholders and institutional investors to expand its fully taxable business into other Saudi cities. Advisory and legal costs are SAR 6 million.

ZATCA allows deduction of the VAT charged on those costs in line with the company’s usual recovery proportion, which is 100% on the example’s facts. Read the complete official example.

The significant facts are the issuer receiving the services, new capital, use of funds solely for expansion of the ongoing taxable business, and the one-off event. The example does not automatically decide fees paid by an existing shareholder selling its own shares, an acquisition made for passive investment, or costs benefiting several group entities.

Dariba’s analysis. Trace the engagement and use of funds before applying a recovery ratio. A company paying a shareholder’s disposal fees has a different recipient and purpose question from the company raising its own capital. Accounting for both under transaction costs does not remove that difference.

The fraction treatment follows the qualifying event

Section 14 also explains that values of qualifying incidental taxable or exempt supplies are excluded from the default proportional calculation. That treatment prevents a qualifying exceptional event from distorting the measure of ordinary activity. Establish that the event falls within the guidance before excluding its value.

Do not exclude every large receipt or occasional disposal automatically. Consider Article 51(5)‘s separate exclusions, the nature of the supply and whether it is an ordinary activity of this taxpayer. The input-cost treatment and the turnover adjustment should be recorded as separate decisions.

Dariba illustration: a mixed business raising equity

Assume a company has ordinary qualifying taxable supplies of SAR 8 million and exempt supplies of SAR 2 million, giving an applicable 80% recovery proportion. It raises SAR 50 million of new equity solely for its ongoing mixed economic activity. The raise meets the incidental-event conditions, the company receives the services, and eligible advisory fees are SAR 1.5 million plus SAR 225,000 VAT.

On Dariba’s assumed facts, the related input-tax deduction is SAR 225,000 x 80% = SAR 180,000. The qualifying SAR 50 million issue value is not added to the default fraction. These are original Dariba figures, not another ZATCA example or a claim that every equity raise has the same result.

Change the facts and the conclusion needs review. If part of the fees belongs to an existing shareholder’s sale, first identify whether the issuer received those services for its own qualifying activity. If funds support a separate non-economic investment, do not simply apply the 80% fraction to the whole invoice. If the transaction is an ordinary repeated activity, section 14 directs the taxpayer back to the usual attribution rules.

Sukuk programmes, banks and transaction frequency

Article 29(6) exempts the specified issue or transfer of debt and equity securities. That classification does not, by itself, settle the issuer’s costs under Article 51(11). A sukuk arrangement must be examined through its actual supplies, parties, purpose and eligible expenditure; different structures should not be treated as identical merely because they share a financing label.

Section 14 limits its special approach to events outside the usual activities of the business. Regular transactions follow the normal deduction framework. A bank’s rights issue is therefore not automatically incidental, and a non-financial company’s sukuk issue is not automatically one-off. Review the actual funding activity, frequency and use of the costs.

Returning to normal rules also does not automatically put every funding invoice into the residual pool. Some costs may be directly attributable to a particular exempt or taxable activity; genuinely shared costs require the appropriate method. An approved sectoral method must be applied within its terms.

Business transfers and incidental real estate

For paragraph 11(b), establish the current Article 17 outside-scope conditions before relying on the incidental-cost route. Input-tax analysis cannot turn an ordinary asset sale into a transfer of an economic activity. A buyer’s and seller’s costs also require their own recipient, activity and use analyses; neither automatically inherits the other’s recovery percentage.

Paragraph 11(c) is likewise specific. An incidental exempt property transfer by a taxable trading business must be distinguished from regular property dealing or a separate exempt activity. A transaction being the first of its kind is evidence to consider, not a statutory safe harbour. Keep the assessment of the property supply and the treatment of related VAT costs separate from any other tax applying to the transfer.

Treasury income: use the current Q&A carefully

Q&A 6, section 19, page 71, explains that interest on an immediately accessible current account is not treated as consideration for an exempt supply by the account holder for the default fraction. Read the official answer.

The same answer calls for an assessment of costs connected with other financial-investment income that is exempt or outside scope, including its operating costs and use of shared inputs. It does not say that all other investment income is necessarily exempt turnover or that every short-term deposit is incidental.

Classify each arrangement before updating the recovery ratio. A treasury ledger can contain different activities and receipts. Separate taxable, exempt and non-economic use of costs rather than infer a single treatment from the existence of interest or investment income.

Holding-company costs and unresolved transactions

Sections 12.1-12.2, pages 47-49, require economic/non-economic allocation before taxable/exempt apportionment. A holding company must establish what qualifying supplies it makes and which costs support those supplies. Management-service income does not automatically make all share-acquisition expenditure deductible, and a passive holding should not be assigned a taxable turnover ratio without first establishing economic activity.

For abandoned raises, acquisitions or transactions with changing intentions, neither Example 33 nor section 14 supplies a universal answer. Establish the original and revised purpose, services actually received, any onward recharge and subsequent use. Seek clarification where the evidence does not resolve the treatment instead of presenting failed-transaction costs as automatically recoverable.

We recommend a transaction file showing the statutory category, reason the event is incidental, recipient and purpose of each fee, use of funds, cost allocation, applicable method and fraction adjustments. This makes the advisory conclusion traceable and identifies which factual change would require it to be reconsidered.