In brief
New shares issued in a real estate company's capital increase are not a real estate transaction where existing shareholders take them without changing their percentages, or where new shareholders take them and existing shareholders keep the shares they held before the increase, without disposing of them for five years from the increase.
When a new investor subscribes for 40% of a land-holding company, the existing owners’ indirect interest in the land falls from 100% to 60%. Economically, that resembles selling 40% of the land. Article 2(j) treats it as a capital raise instead, provided the existing owners stay invested.
The Provision: Exact Text
What It Means in Plain English
On a RETT capital increase, there is no RETT if existing shareholders take the new shares pro rata, or if new investors take them and the existing shareholders keep their original shares for five years. If existing shareholders sell within that period, the capital increase becomes taxable.
Breaking Down the Provision
| Case | Who subscribes | Condition |
|---|---|---|
| 1 | Existing shareholders | Percentages unchanged after the increase |
| 2 | New shareholders | Existing shareholders keep their pre-increase shares for 5 years |
ZATCA’s Position
The Guideline’s Example 3:
- (A) Two 50/50 partners increase capital, and both stay at 50%. Outside RETT.
- (B) A new investor subscribes for the new shares, and the existing partners keep their shares for five years. Outside RETT.
ZATCA adds that capital increases are taxable where existing shareholders’ percentages change outside these cases, or where existing shareholders fail to keep their shares for five years after a new investor joins.
Worked Examples
Example 1: Pro-rata rights issue
Three shareholders (50/30/20) inject SAR 60,000,000 in the same proportions. Outside RETT, with no conditions.
Example 2: New investor joins
A family-owned real estate company (100% family) issues new shares to a fund, which ends up with 45%. The family keeps all its original shares. Outside RETT, provided the family does not dispose of those shares until five years after the increase.
Example 3: Retention breached
In year three, a family member sells part of his original shares. Breach. The Guideline indicates that the capital increase becomes taxable. A sensible base is Article 2(e): the FMV of the company’s real estate at the increase date multiplied by the 45% the fund acquired. Tax is payable within 30 days of the breach. Separately, the family member’s own sale may be taxable under Article 2(i) if it meets the thresholds.
Grey Areas
| Situation | Our view |
|---|---|
| Disproportionate subscription by an existing shareholder | Not Case 1. Whether Case 2 covers existing shareholders taking new shares is unclear. Seek a ruling. |
| Exempt transfers of the original shares within five years (e.g. a qualifying merger) | Article 3(c) safe harbours address exemption holding periods. Applying them to Article 2(j) is not express, but it is arguable by analogy. |
| New investor below 30% | Article 2(j) still frames the issue. A small dilution arguably would not have been a “real estate transaction” anyway under the 30% logic. |
Compliance Checklist
- Document the shareholding before and after the increase.
- For new investors, record the existing shareholders’ undertaking to retain their shares for five years.
- Diary the fifth anniversary of the increase.
- If retention fails, assess RETT and file within 30 days.
Common Mistakes
- Assuming all capital raises are outside RETT.
- Selling founders’ shares within five years of a new investor joining.
- Disproportionate rights issues treated as pro rata.
The Bottom Line
Article 2(j) allows land-rich companies to raise new equity without RETT, in exchange for a five-year commitment from the existing shareholders when an outsider joins. Plan exits with that period in mind.
Key takeaways
- A capital increase in a real estate company is outside RETT in two cases set out in Article 2(j).
- Case 1: existing shareholders take the new shares in proportion, so their percentages are unchanged. No conditions apply.
- Case 2: new investors take the new shares, and existing shareholders keep their pre-increase shares and do not dispose of them for five years.
- ZATCA's Guideline says capital increases become taxable if existing percentages change outside these cases, or if existing shareholders fail the five-year retention.
- Disproportionate subscriptions by existing shareholders, such as one partner taking all the new shares, fall outside Case 1.
- This is the main tool for raising equity into land-rich companies without a RETT cost.
Frequently asked questions
Is a capital increase in a real estate company subject to RETT?
Not in two cases under Article 2(j) of the RETT Implementing Regulations: where existing shareholders take the new shares without changing their ownership percentages, or where new shareholders subscribe and the existing shareholders keep their pre-increase shares without disposing of them for five years from the increase.
What if an existing shareholder sells shares within five years of a new investor joining?
The condition is breached, and ZATCA's Guideline states that the capital increase becomes subject to tax. The tax is payable within 30 days of the breach, by analogy with Article 5(A)(2). The value is likely to follow the share-transfer method in Article 2(e).
Is a pro-rata rights issue subject to RETT?
No. If all existing shareholders take up new shares in proportion, so that their percentages do not change, the issue is outside RETT without any holding condition (Article 2(j)(1); ZATCA Example 3A).
What if only one existing shareholder subscribes to the increase?
Their percentage rises and the others' fall, so Case 1 does not apply. Case 2 refers to 'new shareholders', so it is unclear whether it covers an existing shareholder taking more. Treat disproportionate increases cautiously and consider a ruling.
Sources
Based on the RETT Law (Royal Decree No. M/84, effective 10 April 2025), the RETT Implementing Regulations (ZATCA Board Resolution No. 01-03-25 dated 24 March 2025, unofficial English translation) and ZATCA's Detailed RETT Guideline Version 6 (May 2026). The Arabic text prevails. This article is general information, not advice on any specific transaction. dariba.co is an independent knowledge platform and is not affiliated with ZATCA.