RETT Exemption for Mergers and Acquisitions Between Legal Persons: Article 3(a)(16) Explained

Consolidation is changing the Saudi corporate market, with family groups merging operating companies and listed developers combining. Where the businesses own land, a merger moves real estate from one legal person to another. A share-for-share acquisition of a real estate company triggers the share-transfer rules in Article 2(i). Without relief, either route can cost 5% of the property value.

Article 3(a)(16) provides that relief. Its conditions are strict and they are applied as written, so the deal terms need to be drafted with them in mind.

The Provision: Exact Text

The definitions in Article 1 matter here. A Merger is the merger of one or more existing legal persons into another existing legal person, or of two or more existing legal persons to form a new one, under the provisions regulating mergers in the Kingdom. An Acquisition is a share exchange, including securities, that results in acquiring the entire shares of a real estate company, where both transferor and transferee are legal persons. ZATCA’s Detailed RETT Guideline covers this exemption at section 5.1.17.

What It Means in Plain English

The RETT merger and acquisition exemption means that property moving in a qualifying merger, or shares changing hands in a qualifying share-for-share acquisition of a real estate company, carries no RETT. The consideration must be shares only, the shareholders must hold the new shares for five years, and an acquisition must take 100% of the target in one transaction.

Limb (a): Mergers

Condition 1: Shares-only consideration

The shareholders of the merged entity may receive only shares in the surviving or new entity. Any cash or in-kind consideration on top, however small, breaks the condition. ZATCA’s Example 44: a partner receives SAR 100,000 in cash plus shares, and the transaction is taxable.

Condition 2: Proportionality

The shares received must be proportional to each owner’s prior ownership rights. ZATCA’s Example 45: an owner with 40% of the merged entity receives 10% of the surviving entity, which represents only about 60% of the value of his prior rights. That distortion is a breach even though no cash was paid.

Proportionality is measured against value, so the merger ratio must be supported by a credible valuation of both entities.

Condition 3: Five-year retention

The shares must remain owned, directly or indirectly, by the same shareholders for five years from the merger date. ZATCA’s Example 46: a shareholder transfers his shares two years after the merger, and both the original merger and his later transfer become taxable. A disposal as part of a later merger that itself qualifies is permitted (see also Article 3(c)(3)).

Objecting shareholders

Shareholders who oppose a merger can usually exit for cash under the Companies Law. That consideration is outside the exemption. ZATCA’s Example 47: an exiting shareholder receives cash and an asset, and that is a taxable real estate transaction.

Limb (b): Acquisitions

The definition sets the scope

An “acquisition” here is narrow:

• it must be a share exchange;
• it must result in acquiring the entire shares of a real estate company; and
• both transferor and transferee must be legal persons.

Individuals selling their shares in exchange for shares in the acquirer are not covered by limb (b).

Condition 1: Shares-only consideration

The consideration must be shares in the acquiring person only, with no cash or in-kind top-up.

Condition 2: Five-year retention

The former owners of the target must retain the acquirer’s shares for five years from registration or ownership. A disposal in a later qualifying merger or acquisition is permitted.

Condition 3: A single transaction

The acquisition must be completed in one transaction. ZATCA’s Example 48: 70% is transferred first and the remaining 30% later. The deal fails the test and is taxable.

Worked Examples

Example 1: Merger of two family companies

Company A (property worth SAR 200,000,000) merges into Company B (property worth SAR 300,000,000). A’s shareholders receive 40% of B, in line with relative values. No cash is paid. Exempt, provided all shareholders keep their B shares for five years. RETT avoided on A’s property: SAR 10,000,000.

Example 2: Cash for fractional shares

Same merger, but the share ratio produces fractions and A’s shareholders receive SAR 45,000 in cash for them.

Strictly, that is cash consideration. ZATCA’s position in Example 44 suggests it would treat the merger as taxable. Fractional entitlements should be rounded or settled through a share mechanism, not cash.

Example 3: Share-for-share acquisition

HoldCo X (a company) acquires 100% of RealCo Y, a real estate company, from Y’s corporate shareholder Z, in exchange for new shares in X, in a single transaction. Exempt. Z must keep its X shares for five years.

If instead Y were owned by two individuals, limb (b) would not apply, because the transferors must be legal persons. The 30% rule in Article 2(i) would make the share transfer taxable unless another exemption applies.

Example 4: Breach in year three

Two years after the Example 1 merger, one of A’s former shareholders sells her B shares. Following ZATCA’s Example 46, the merger becomes taxable, and her sale may itself be taxable if B is a real estate company and the 30% threshold is met. Tax is payable within 30 days of the breach (Article 5(A)(2)).

Grey Areas

Compliance Checklist

1. Confirm both parties are legal persons and that, for acquisitions, the target is a real estate company acquired in full.
2. Draft the deal for shares-only consideration, including how fractions are handled.
3. Support the merger ratio with valuations that show proportionality.
4. Complete acquisitions in a single transaction.
5. Register the transfers on ZATCA’s RETT portal. For share transfers, register by the payment date in Article 5.
6. Monitor shareholdings for five years, and record any later qualifying merger or acquisition that is relied on.

Common Mistakes

• Cash top-ups and fractional payments.
• Merger ratios not supported by valuation.
• Staged acquisitions.
• Individuals as transferors in an acquisition.
• Overlooking dissenting shareholders. Their exit consideration is taxable.

The Bottom Line

Article 3(a)(16) can take a large consolidation entirely out of RETT, but its conditions are strict. Shares only, proportionate, one transaction, and five years’ retention. Advisers should build these into the term sheet from the start, because it is very difficult to repair a deal that has already been signed with a small cash element.