Saudi Arabia: Disposal of real estate - RETT/ VAT exemptions and obligations of the financial institutions

In detail

Through the circular, ZATCA explained the following:

• VAT treatment where ‘temporary transfer’ is done on a property for using it as a collateral for security purposes against provision of a finance.

• Application of exception from RETT in the case referred to above.

What is a real estate mortgage?

Mortgage of real estate refers to a temporary transfer of real estate for the purpose of using it as credit or security in return for obtaining finance. This in fact represents a legal right in which the “borrower” provides the property in favor of the “financier” for a specified period (usually covering the financing period).

The "financier" is one of the approved financial institutions such as banks, finance companies etc.

The VAT treatment of real estate mortgage

As the process of transferring ownership of real estate is ‘temporary’ with no intention to permanently transfer the ownership, such a transfer is not considered a supply of goods for tax purposes and accordingly would be out of scope for VAT purposes.

The RETT treatment of real estate mortgage

The process of transferring a property temporarily by its owner as a security for financing purposes (i.e. where the property is used as a collateral to get the required finance without permanent transfer) is amongst the exclusions contained in the RETT regulations.

Important considerations

Where the transfer of property is being made on a permanent basis, the exception available from VAT and RETT purposes will stand rescinded and the disposer of the property needs to assess the related VAT and RETT implications keeping in mind the date of disposal of real estate properties.