Understanding Saudi Arabia's new real estate transactions tax

Saudi Arabia - News channels and social media platforms are abuzz with discussions and opinions about the newly imposed 5 percent tax on real estate transactions and its overall impact on the sector.

A Royal Decree has exempted all real estate transactions involving ownership and sale from the 15 percent value-added tax (VAT), replacing it with the new tax of 5 percent of the value of a property at the time of sale.

A real estate transaction is any legal action that leads to the transfer of ownership of a property or usufruct for the purpose of ownership or lease, including different forms of sale and barter, and financial leasing.

The new tax will be imposed on the value of the property that is to be sold or transferred regardless of its condition or form. It includes the land and what is constructed on it. The tax has to be paid before or during the transaction or documentation process.

The purpose of the tax is to support citizens and help them own houses and commercial property in order to boost the Kingdom’s economy.

The state will now bear SR1 million ($267,000) of the total property value for first-time homeowners.

There are 12 cases where real estate transactions are exempted from the tax, such as dividing property among inheritors or transferring a property as a gift to children or to a relative up to the second degree.

The exceptions also include presenting real estate as a share in kind in a joint stock company, provided that the corresponding shares of the property may not be disposed of for more than five years.

Any government agency that sells real estate, and the transfer of a property to a government entity is also exempted, where the board of directors has the right to recommend more exceptions.

These exceptions extend to cover cases of forcible removal of a property when expropriation is in favor of the public benefit or temporary seizure of the property, or the temporary use of the property for the purpose of securing financing or credit in case it is not permanently transferred to a financier or others.

Financial lease contracts and lease contracts that have been completed before the implementation of this regulation are also exempted from the tax.

Other exemptions include transferring property between a fund and a custodian temporarily, or the transaction of property if one of the parties is a foreign government, international organization, diplomatic or military body or mission when dealing with reciprocity, or real estate supplies that are subject to VAT before it is authenticated.

Procedures have been defined clearly for the payment of the tax. Two bodies are involved in the entire procedure — the General Authority of Zakat and Tax (GAZT) and the Ministry of Justice.

For GAZT, one has to visit its website and choose the tax from several options. After completing certain formalities such as the seller’s date and contract number, one needs to disclose the nature and type of the property. Once the value of the property is calculated, an invoice of 5 percent tax will be issued to be paid by the taxpayer.

With regard to the procedures of the Ministry of Justice, the authority stated that the transactions should be processed and notarized at the notary after paying the tax. The final step is to document the contract and the seller will be notified of the completion of the process.

According to the GAZT, the competent authority will not complete the documentation process without a receipt confirming the payment of the tax.

• Dimah Talal Alsharif is a Saudi legal consultant, head of the health law department at the law firm of Majed Garoub and a member of the International Association of Lawyers. Twitter: @dimah_alsharif