What Is the RETT Tax Base? How the Taxable Value Is Determined

RETT is charged at 5% — but 5% of what, exactly? The answer matters more than it might appear, because the base for RETT calculation is not simply whatever number the parties write into their sale agreement.

Under Article 2(c) of the Implementing Regulations, the RETT base is the total value of the real estate transaction, defined as the value of any consideration — whether cash or in kind — agreed in connection with the transaction. This is the agreed price, whenever that is within the limits of fair market value.

That qualifier is the key. Fair market value (FMV) is a floor, not a ceiling. If the agreed price equals or exceeds FMV, the agreed price is the RETT base. If the agreed price is below FMV — or if there is no cash consideration at all, as in a gift or contribution in kind — ZATCA will assess the transaction at FMV.

FMV is defined in ZATCA’s Detailed Guideline as the value that would be agreed between unrelated, independent parties dealing at arm’s length in ordinary business conditions, taking into account the nature of the transaction and the actual ownership transfer date. This is a market-referenced, objective standard — not the book value of the property, not the historic acquisition cost, and not the parties’ subjective valuation.

The RETT base is broad. Article 2(d) of the Implementing Regulations confirms that the following are treated as part of the total real estate value:

• The real estate itself — land, buildings, structures permanently attached to land
• Primary real rights — ownership rights and similar primary rights in rem directly linked to the real estate
• Secondary (accessory) real rights — rights inseparable from the primary right, such as easements, access rights, and servitudes linked to the real estate
• Permits and licences inseparable from the real estate — where a permit is closely linked to and inseparable from the real estate, it forms part of the transaction value (e.g., a development permit for a specific plot)
• Movable property intended for permanent service of the real estate — under Article 2(b), movable property placed by the owner within their real estate, intended for the permanent service or exploitation of that real estate, is treated as real estate even if not physically affixed

The last point — movable property — deserves attention. Permanently installed machinery in a factory, built-in plant and equipment, fitted-out retail fixtures, and agricultural equipment integral to a farm property could all be captured in the RETT base if they were placed in the property by the owner for its permanent service. Whether a specific asset falls into this category depends on the facts, and ZATCA has the power to include such assets in its own value assessment.

The Regulations carve out one important exclusion: the implicit profit margin in Islamic finance transactions. Specifically, for Murabaha and Ijara contracts entered into for the purpose of ownership or finance leasing, the transaction is taxable only once (on the first transfer from the original owner to the licensed financing entity), and the profit margin built into the financing arrangement is not treated as additional RETT base (Article 2(l) of the Regulations).

This is a practical relief for Islamic finance. Without it, buyers financing property through Murabaha (where the bank buys the property then sells it to the buyer at a mark-up) would face RETT on the full Murabaha price including the bank’s profit. The Regulations treat the underlying property value — not the Murabaha gross consideration — as the taxable base, subject to meeting the conditions specified in Article 2(l).

Beyond this specific carve-out, the following items are generally not part of the RETT base:

• Movable property genuinely separate from the real estate — furniture, non-installed equipment, inventory, vehicles
• Service charges or ongoing contractual obligations (e.g., maintenance contracts) that are separate from the real estate transfer itself
• VAT charged on construction services — these are a separate tax base under a different regime

The key risk is where parties attempt to strip value out of the real estate component by allocating it to movable assets or non-real-estate elements. ZATCA has explicit authority under Article 8 of the Regulations to verify values and reapportion in cases where the allocation between real estate and other assets appears artificial or unsupported.

The Regulations set out specific valuation rules for transactions that do not follow the standard sale model:

Share Transfers in Real Estate Companies

Where the transaction involves the transfer of shares or interests in a real estate company (triggering RETT through the look-through rule), the RETT base is the fair market value of all real estate owned directly or indirectly by the company, multiplied by the percentage of the shares transferred — or the value agreed between the parties and allocated to the real estate, whichever is higher (Article 2(e) of the Regulations).

This means a buyer paying SAR 100 million for a 40% stake in a company whose real estate portfolio is worth SAR 200 million would face RETT on SAR 80 million (40% × SAR 200 million FMV) — not on the SAR 100 million deal price, unless the parties’ allocation to real estate is higher.

Long-Term Usufruct Rights (Over 50 Years)

Where RETT is triggered by the grant of a usufruct right exceeding 50 years, the RETT base is the higher of: (a) the present value of the FMV of the right to use on the disposal date, or (b) the present value of the total consideration agreed (Article 2(f) of the Regulations). If the consideration is amended after the disposal date, a correction request must be submitted if the recalculation results in a change to the tax due.

BOOT Projects

For Build-Own-Operate-Transfer projects, the RETT base is the FMV of the real estate on the date of actual transfer of ownership to the transferee — being the date on which all conditions for the transfer are met under the BOOT contract (Article 2(g) of the Regulations).

Commercial real estate deals frequently bundle real estate with other assets — operating businesses, equipment, goodwill, contracts, and licences. Getting the apportionment right is not just a tax issue; it determines the RETT base and therefore the amount due.

ZATCA’s approach is to apply RETT to the real estate component of any mixed transaction. The challenge lies in proving that the non-real estate allocation is genuine, supportable, and not a mechanism for deflating the RETT base. A well-documented apportionment — with independent valuations separating real estate from other assets — provides the best protection against a ZATCA reassessment.

Article 8 of the Implementing Regulations gives ZATCA explicit authority to verify and potentially reassess the transaction value in a range of circumstances. These include:

• Transactions between related persons — where parties may have motivation to artificially set the price
• Transactions where consideration is divided between real estate and other assets — the allocation between components is a common area of scrutiny
• Cases involving non-cash consideration — barter transactions, in-kind contributions, and similar arrangements
• Transactions with an unknown or unspecified value
• Real estate transactions that are not notarized or not disclosed to ZATCA
• Cases where ZATCA suspects manipulation of value for any purpose, including tax avoidance

When ZATCA exercises this verification power, it must first give the transferor (or transferee) the opportunity to submit an assessment by an accredited assessor. ZATCA can then accept or reject that assessment. If ZATCA concludes the value is below FMV, it may use approved real estate market indicators or engage its own accredited assessor.

ZATCA can demand the additional RETT due — on the gap between the declared value and the assessed value — within three years of the disclosed transaction date (or three years from the date ZATCA became aware of an undisclosed transaction).