Types of Real Estate

Residential:

• Homes (flats or apartments)
• Primary residence of people
• Student accommodation

Commercial:

• Property for business purposes
• Property for non-residential purposes

Taxable/ VAT Registered Person
Someone who carries out economic activity in the KSA

Resident
Someone who has a place of residence in the KSA for VAT purposes

Non-Resident
Someone who has no place of residence in the KSA

Sale of Residential Property

Sale of residential real estate is taxed at the standard rate (5%). However, if prior to the supply, the property was used or intended to be used as a permanent residence of the seller, or one of the seller’s relative (up to the fourth degree), then its sale will not be considered an economic activity.

Rent of Residential Property

The rent of residential property is exempted from VAT.

Lease of Serviced Apartments

Lease of serviced apartments are taxed at 5%. Units that qualify as residential units and are used as a regular residence are exempted from VAT.

Sale of Commercial Property

Sale of property for commercial purposes is taxed at the standard rate (5%).

Rent of Commercial Property

Rent of property for commercial purposes is taxed at the standard rate (5%).

Lease Contracts Signed before January 1st 2018

Only the portion of the lease related to the supply that will take effect on or after January 1st 2018 will be subject to VAT (5% for commercial property and exempted for residential property).

Sale of Real Estate

Sale of real estate includes:

• Residential property (flats or apartments)
• Commercial property
• Transfer or ownership of bare or undeveloped land
• Partly completed construction work

Transfer of the Ownership of Land

The transfer of ownership, or any other transaction which gives full ownership of the property to the buyer is considered as a standard rated supply (5%).

Constructions Services

Construction services are taxed at 5%. These includes activities of sub-contractors on projects such as:

• Engineering, Procurement and Construction Contracts (EPC)
• Lump Sum Turn Key (LSTK) contracts

Input VAT in Real Estate

You can deduct input in the following cases:

• VAT is charged on materials, sub-contractors or other suppliers in the monthly or quarterly period in which it is incurred
• Proof of taxable invoice with evidence of input VAT paid approved by the ZATCA

You cannot deduct input VAT in the following cases:

• VAT exempted activities (in residential real estate)
• Non-economic activities (like entertainment and motor vehicles)

Non-Residents Supply of Real Estate

Suppliers who are not residents of the KSA cannot charge VAT for real estate service provided in the KSA. It is the duty of the receiver of these supplies to account for VAT under the reverse charge mechanism.

For example, if Company A, based in Kuwait, charges Company B for designing the interiors of a building in Saudi, then the company in Saudi, i.e. Company B must account for VAT applicable under the reverse charge mechanism.

Expenses for Construction

You can deduct input VAT paid on expenses incurred on construction if the following conditions are met:

• Expenses are incurred during the initial stages of construction (before project is completed or payments received)
• Expenses are part of the taxable supplies done by a taxable person

You cannot deduct input VAT on expenses under the following conditions:

• Expenses are not part of the economic activities of the business
• Entertainment, certain motor vehicle expenses

Resale of Property

If you purchase a house from a family, make improvements to it and sell it, VAT is applicable on all the relevant supplies.