Saudi VAT on Used Cars: Profit-Margin Method Explained

The profit-margin method is an optional, approved VAT mechanism for qualifying used-car sales. It is not a general rule that every second-hand vehicle is taxed only on the dealer’s accounting profit. Article 48 and ZATCA’s used-car conditions govern the car, purchase chain, dealer approval, calculation, invoices and records.

Obtain approval and establish the qualifying category

Article 48(1), p. 46, requires ZATCA’s approval notification before using the margin method. Paragraph (2) requires qualifying used goods in the Kingdom, within the Authority’s classified category, an eligible domestic purchase and compliance with the article’s records/supply conditions.

ZATCA’s Simplified Guideline for Calculation of VAT on the Profit Margin for Qualified Used Cars, sections 1–3, pp. 3–6, explains the used-car resolution effective from 1 July 2023. It concerns VAT-taxable persons licensed for car trading through a commercial registration or equivalent licence, such as qualifying agencies/showrooms, after approval.

The method is optional. Eligibility does not compel every dealer to use it, and being VAT-registered alone does not establish licensed car-trading status or approval. An application awaiting review is not an effective authorization.

Check the particular car and how it was acquired

The guideline section 4, p. 6, requires a used car previously driven for personal/business use, registered in the Kingdom and fit for reuse in its current condition or after improvements that do not change its basic nature. New cars do not qualify.

Article 48(2)(b) addresses purchase in the Kingdom from a non-taxable person, a taxable person acting outside economic activity, or a supplier using this margin method, with its non-deduction condition. Section 3 also excludes ordinary-method input VAT incurred on the purchase consideration.

Establish the seller’s actual capacity and prior VAT treatment. A private individual’s name on a contract does not prove every sale is outside economic activity. Likewise, a normal VAT invoice does not become a margin purchase merely because the buyer decides not to deduct the VAT.

Imported used cars are not converted into margin stock by age

Article 48(3) excludes goods outside the Kingdom or moved into/out of it as part of the taxable person’s purchase/supply. The guideline section 4 identifies imported cars, even if used abroad, and cars purchased under an invoice with ordinary separately stated VAT as non-qualifying cases.

Its Example 2, p. 9, describes Sarah Showroom buying a used 2020-model car from another country for SAR 100,000. The example does not allow margin treatment merely because the car is old and meets technical standards.

Dariba analysis: distinguish a qualifying domestic used-car purchase from the dealer’s import transaction. Later local registration does not by itself rewrite the acquisition facts. The imported-goods guide explains the separate import and resale events.

Calculate the statutory margin rather than accounting profit

Article 48(6) defines the margin from consideration received for the qualifying sale less consideration payable for its purchase; other expenses/amounts incurred in making the supply do not reduce that statutory margin. Paragraph (7) applies Article 45’s inclusive tax calculation.

Guideline Example 1, p. 9, gives a qualifying 2021-model car bought for SAR 80,000 and sold for SAR 103,000 by an approved showroom. Margin is SAR 23,000 and VAT is SAR 23,000 × 15/115 = SAR 3,000. The taxable margin exclusive of that VAT is SAR 20,000.

A dealer’s workshop, advertising or finance costs are not automatically subtracted before calculating the Article 48 margin. They may affect commercial profit and require separate input analysis, but they do not change the purchase/sale consideration formula merely because they reduce the dealer’s net earnings.

Zero or negative margins do not create a negative VAT allowance

Article 48(8) makes the supply value zero where the paragraph (6) margin is zero or negative. It does not create a negative margin credit to offset another car’s positive margin.

Dariba illustration — original assumptions: an otherwise qualifying car is bought for SAR 90,000 and sold for SAR 85,000. The SAR 5,000 loss gives a zero value under this rule, not negative VAT on SAR 5,000. This is a separate assumed example, not ZATCA’s published Example 1.

Track each qualifying sale rather than substituting the showroom’s aggregate annual profit. A profitable inventory line and a loss-making car do not automatically form a statutory pooling mechanism under these paragraphs.

Issue the correct sale invoice and purchase document

Article 48(4) requires the tax invoice to state clearly that the supplier uses the profit-margin method and not separately show a tax amount for the supply. A business customer cannot infer a deductible VAT amount by applying 15/115 to the whole car price.

Where buying from a non-taxable person, paragraph (5) requires the taxable buyer to issue a purchase invoice/document identifying its name/address/TIN, the seller’s name/address, purchase date, goods details including relevant registration/Authority-required information, and purchase consideration.

These requirements coexist with Article 53’s applicable invoicing rules. Obtain accurate seller and vehicle details at acquisition; an internal stock number alone does not replace the required identity and consideration evidence.

Keep the item register and separate input restrictions

Paragraph (9) prohibits deduction of VAT charged/included in acquiring the qualifying used goods. Paragraph (10) requires a register with the paragraph (5) details, sale invoice number, sale consideration, customer identity/address, margin and VAT due, alongside the article’s retention reference and ordinary record obligations.

Do not use the prohibition on acquisition VAT as a blanket denial or permission for every other dealer overhead. Repair, rent, advertising and other actual supplies require their own recipient, use, evidence and restriction analysis under Articles 49–51.

Reconcile purchase document, vehicle registration, approval, sale invoice, margin calculation and return. This is particularly useful where ordinary-method and margin-method vehicles coexist in the same showroom.

Failure of a condition can expose the full consideration

Article 48(11) denies margin treatment for a supply where its requirements are not met and requires VAT on the full consideration. Approval alone does not protect a non-qualifying car or missing transaction requirements.

Dariba original comparison using expressly inclusive prices: VAT on a qualifying SAR 23,000 margin is SAR 3,000; VAT on an ordinary standard-rated SAR 103,000 inclusive selling amount is SAR 13,434.78 rounded to two decimals. The comparison assumes the relevant price basis and does not assert the dealer can automatically recover additional cash from the customer.

Dariba recommends deciding the method when each car is acquired, then confirming qualification again at sale. A complete file protects the actual statutory route; an attractive commercial margin or a customer’s preference for a low VAT figure cannot establish eligibility.