Zero rated Vs. Exempt Supply under Saudi VAT regulations

Both zero-rated and exempt supplies result in no VAT being charged to the customer. That is where the similarity ends — and where most classification errors begin.

The difference lies entirely in what happens to input VAT on the costs that produce those supplies. A business making zero-rated supplies can recover all input VAT it paid on related purchases — it is a full participant in the VAT system, just at a 0% output rate. A business making exempt supplies cannot recover any input VAT on costs directly attributable to those supplies. That unrecovered VAT becomes a permanent cost embedded in the P&L.

One important rule resolves conflicts: where a supply qualifies as both exempt and zero-rated under the Regulations, it is treated as zero-rated. Zero-rating always prevails over exemption.

The following supplies are zero-rated under Chapter 6 of the VAT Implementing Regulations. All carry full input VAT recovery rights.

Exports of Goods (Article 32)

Goods exported from the Kingdom to a destination outside GCC territory are zero-rated. The critical requirement: the supplier must retain evidence that goods departed GCC territory within 90 days of the supply date. This evidence must include customs export documentation and a commercial transport document. After 90 days, zero-rating cannot be applied retroactively — the supply becomes standard-rated. This deadline is absolute.

Services to Non-GCC Residents (Article 33)

Services supplied to a customer who has no residence or establishment within any GCC member state are zero-rated, provided the benefit of the service is received outside the GCC. This is the primary zero-rating route for professional services, consulting, and digital services exported to non-GCC clients. The supplier must retain documentary evidence of the customer’s non-GCC status. Under the April 2025 amendments, tourist tax refund services are also specifically zero-rated under this Article.

International Transport (Article 34)

The international transport of goods and passengers is zero-rated, along with directly incidental services including luggage handling, seat reservations, and sleeping berths on qualifying international journeys. Qualified means of transport — aircraft and vessels meeting international route criteria — and their maintenance, repair, and modification services also qualify, subject to the supplier obtaining a certificate from the customer confirming the qualifying use. A mixed-use transport operator (domestic and international routes) must apply a four-factor average test to determine what proportion of its activity qualifies.

Qualifying Medicines and Medical Equipment (Article 35)

Medicines and medical goods classified as qualifying by the Ministry of Health or other competent authority are zero-rated. The classification is dynamic — it is updated by the relevant authority from time to time. Businesses in this sector must monitor the approved classification lists to confirm continued zero-rating eligibility.

Investment Metals (Article 36)

The first supply of gold, silver, or platinum by its producer or refiner is zero-rated. Subsequent supplies for investment purposes are also zero-rated where the metal meets a purity threshold of at least 99% and is tradeable on the global bullion market. Jewellery and processed metal products do not qualify — this is an investment-grade metal provision, not a general precious metals exemption.

Qualified Military Goods (Article 36 Bis)

Locally manufactured military goods supplied to Saudi armed forces and government security forces are zero-rated, provided the supplier is registered with ZATCA, licensed by the General Authority for Military Industries, and holds a valid supply certificate for each contract. Under the April 2025 amendments, the certificate requirements were simplified — the separate contract-by-contract data requirement was removed in favour of a single supplier-level certificate confirming compliance.

Supplies to Diplomatic Missions (Article 36 Bis 2)

Supplies from qualified suppliers to diplomatic missions are zero-rated. The conditions and qualification criteria for suppliers are set by a decision of the ZATCA Governor.

Customs Duty Suspension Situations (Article 32 Bis — New April 2025)

A new Article 32 Bis, introduced by the April 2025 amendments, provides that supplies of goods into a customs duty suspension situation, and supplies of goods within such situations, are zero-rated in accordance with the Unified Customs Law. The previous clause 7 of Article 32 (which zero-rated goods subject to a customs duty suspension regime) was deleted and replaced by this broader, standalone provision.

The following supplies are exempt under Chapter 5. No input VAT may be recovered on costs directly attributable to these supplies.

Financial Services (Article 29)

The supply of financial services where the consideration is implicit — meaning it is derived from a margin, spread, or profit-share rather than an explicit fee — is exempt. This covers interest-bearing loans, profit from Islamic financing arrangements, foreign exchange dealings where profit is earned on the margin, and the issue or transfer of debt securities. By contrast, financial services charged as explicit fees — advisory fees, arrangement fees, account management fees — are generally standard-rated. The boundary between fee-based and margin-based financial services is one of the most technically complex areas of Saudi VAT.

Residential Real Estate (Article 30)

The sale and lease of residential real estate is exempt. Residential real estate includes private homes, apartments, and student or school accommodation. The exemption covers the legally assigned boundaries of the property — gardens, garages, and permanent fixtures are included.

The following are explicitly excluded from the residential exemption and remain standard-rated: hotels, inns, guest houses, motels, serviced apartments, and any building designed to offer temporary accommodation to visitors or travellers. Short-term holiday rentals fall outside the exemption. The classification of a property as residential or temporary accommodation is a factual question that depends on the nature and terms of the arrangement.

Businesses that make both taxable (including zero-rated) and exempt supplies cannot recover all of their input VAT. They must apply a proportional deduction — recovering only the fraction of input VAT that corresponds to their taxable activity.

The default method calculates this fraction as: taxable supplies ÷ total supplies (taxable + exempt). This ratio is applied at the start of each tax period using estimated figures, then trued up at the end of the calendar year against actual supply values. Any adjustment required is reflected in the final VAT return for that year.

A business may apply to ZATCA to use an alternative method if it more accurately reflects the actual use of inputs. ZATCA can approve or reject such applications, and approved methods are valid for a maximum of five years before a new application is required.

• Treating exempt as zero-rated. Recovering input VAT on exempt activity is a misclassification that ZATCA systematically identifies on audit. Retrospective assessments, penalties, and interest apply.
• Missing the 90-day export evidence deadline. Exporters who cannot produce customs documentation within 90 days lose the right to zero-rate permanently. This is not curable after the deadline.
• Classifying serviced apartments as residential. Any short-term or visitor accommodation arrangement is standard-rated. Applying the residential exemption to serviced apartments or Airbnb-style rentals is a category error that ZATCA can assess retrospectively.
• Failing the investment metal purity test. Precious metal businesses must confirm the 99% purity threshold is met for investment metal zero-rating. Jewellery and industrial metal supplies do not qualify.
• Not true-ing up the proportional deduction. Mixed businesses that apply an estimated ratio throughout the year but fail to reconcile it against actual year-end supply values are filing incorrectly.