What you need to know about real estate transactions tax law

Logo of the Zakat, Tax, and Customs Authority (ZATCA)

Saudi Arabia’s Official Gazette, Umm Al-Qura Newspaper, published in its latest issue the decision of the Cabinet approving the Real Estate Transactions Tax Law, with the detailed provisions.

The Cabinet approved that the Zakat, Tax, and Customs Authority (ZATCA) will implement the provisions stated in Articles 73, 74, and 75 of the Income Tax Law for tax dues under the law provisions mentioned in Section 1 of this decision.

The law states that those who carried out unregistered real estate transactions before the Real Estate Transactions Tax became effective are granted a one-year grace period to legalize document their transactions according to relevant regulations. The date of the real estate transaction must be proven before the competent authority.

This grace period can be extended by the Cabinet based on a proposal from the ZATCA Chairman.

The following are exempt from the Real Estate Transactions Tax:

1- The real estate transactions resulting from leasing contracts for ownership or financial leasing contracts signed before the law’s effective date.

2- The real estate transactions subject to Value Added Tax (VAT) before documentation, provided the documentation occurs after the Real Estate Transactions Tax law became effective.

Moreover, the real estate transactions subject to the law are exempt from VAT, a royal decree has been drafted with the attached format.

Three years after the law comes into force, ZATCA will review the law’s calculation mechanism. This review will include evaluating the suitability of calculating the tax based on tiers or categories according to the property’s use (residential, commercial, agricultural, etc.) and its location, with a report on the findings.

The Real Estate Transactions Tax law consists of 20 articles. The first article defines real estate transactions as any transfer of real estate ownership or transfer of its benefit in a permanent manner (directly or indirectly), or for a period exceeding 50 years.

According to the second article, a tax rate of 5% is imposed on real estate transactions, regardless of the state or form of the property at the time of the transaction, whether the entire property or a portion thereof, whether completed, under construction, or on a plan, and whether or not it is documented. The tax is calculated based on the total transaction value agreed upon between the transferor and the transferee, provided it aligns with the fair market value at the time of the transaction. For tax purposes, the value does not include financing costs from licensed entities.

Real estate transactions are subject to tax only once, as long as there is unity of parties involved, the property, and the transaction value.

Additionally, Article 3 lists 21 real estate transactions that are exempt from the tax, including transactions related to the division of inheritance, real estate transfers without compensation to public, private, or joint endowments, real estate transfers to or from a licensed charitable organization, transfers between spouses or relatives up to the third degree in the form of documented gifts, transfers in compliance with a legally documented will, transfers related to public offerings or trading of listed securities, real estate transactions between investment funds and custodians or between custodians for the same fund under the Capital Market Law, real estate contributed as in-kind shares to a company formed in the Kingdom (provided the shares related to the in-kind contribution are not sold for a period determined by the regulations, not exceeding five years), mergers and acquisitions, and other transactions.

On the other hand, Article 15 outlines the penalties and fines imposed for violations of the system and its regulations, as follows:

A fine not exceeding three times the amount of the tax involved in the tax evasion case. This penalty also applies to anyone found to have participated in, assisted with, or facilitated the tax evasion.

A fine of 2% of the unpaid tax amount for each month or part thereof during which the tax remains unpaid, not exceeding 50% of the total unpaid tax. The fine is calculated starting from the day after the deadline for paying the due tax. An additional fine of 1% of the unpaid tax amount is imposed for each month or part thereof if the tax authority adjusts the due tax amount. This fine is calculated starting 30 days after the notification of the adjustment.

Any person who violates any provision of the law or its regulations may be fined an amount not exceeding the total due tax or SAR 50,000, whichever is greater.

ZATCA’s board of directors, under Article 20, will issue the regulations within 180 days from the date the law was issued. These regulations will be effective from the law’s effective date.